Raising equity capital is harder than it seems
You may be familiar with applying for a car loan or a mortgage and think it is synonymous with raising equity capital – it is not! You are asking someone to part with their money (or better yet, money that someone else has entrusted them to manage) for absolutely no security besides for trusting you that you will succeed and nothing inside or outside of your control will happen to derail your efforts.
Understanding this fundamental difference between a loan and raising equity capital is of utmost importance. This means that next to potential and ability, your job is to minimize risk for investors.
It can be a full-time job and except for specific cases could be expected to take up to 6 months.
To optimize your efforts, follow these steps:
1. Do your research: it will make raising equity capital faster
Firstly, it is important to be pitching to the right investor. What does this mean for you?
Investors have specific mandates and focus is usually organized by the following:
- Check size
- Stage of business,
- Geography,
- Industry, and
- Whether they require another investor to lead the round
If you are not researching which investor meets your criteria and thus trying to reach out to investors that do not match what you are looking for, then you are not optimizing your efforts.
An investor that does not meet what I am looking for asked me to come pitch, so I should go, right?
Wrong! 9 times out of 10 investor’s mandates are going to trump all. Investors are not going to be comfortable investing outside of their comfort zone and what their fund is targeting. So why were you asked to pitch in the first place? Sometimes, investors will ask you to pitch because they have existing businesses that may be somewhat related to what you are doing and so they want to use you for informational gathering.
2. Connect with potential investors personally
Don’t send cold emails. Find a way to network your way to the investor. There are two reasons for this: firstly, and foremost, networking your way to them sends the message that you have networking skills – you can thus network your way to the right suppliers, customers, employees, and other people that will be key to your success, and secondly, they get hundreds if not thousands of cold applications of which they will at most look at 1%.
3. Have a business plan
A business plan helps you get your thoughts down and really test the feasibility of your business. It can act as an appendix for any interested investor who wants to go into more of the details. It should also include detailed financial projections. A professional look is also important here. Don’t try doing it yourself if you are not familiar with what investors will be looking for within a business plan or if you don’t have financial expertise to develop detailed financial projections. AngelytiX has been recognized as a leader in developing start-up strategy and investor material including a business plan, financial projections, pitch deck, and some other tools all part of the Capital Raising Program. Having the right guidance makes raising equity capital much easier and smoother.
4. Perfect your pitch
An ideal pitch portrays you as someone who can build rapport, is passionate and committed, is here with a mission and not just as a mercenary to make money, is able to deal with stress, and is someone that can easily listen and pivot if necessary.
Besides for the qualitative aspects there are certain things that must be in a pitch. This includes the following:
- Demonstrate that you have proved the concept before asking for money
- Why are you (and your team) the best people to run with this project
- Have a teaser slide to make the concept memorable
- Jump into an elevator pitch (30 seconds) so that investors know what you are talking about before you carry on the pitch
- Outline the problem and pain point you are fixing
- Outline the solution (ideally through a demo)
- Market size
- Business model – how will this make enough money
- Anything proprietary?
- Compare your product to any competition
- Go-to-market/marketing plan
- Results – what have you achieved so far
- Capital – how much and how will you use it (be very specific)
5. Be ready to answer key questions and practice being comfortable thinking on the spot
Having someone to coach you and do mock pitches is key here, but here are some common questions that you should be prepared for:
- What does success look like in 12 months?
- Who is ultimately in charge of the team and decisions if a conflict arises?
- Understand how you will act in various what if scenarios that will require you to pivot – demonstrate that you have many back up plans
- What is your customer acquisition cost?
- How can margins adjust as you scale?
- How have you proved the concept of your business?
6. Don’t just raise equity capital – get the best deal
Raise capital ideally only after you have proven the concept, have some sales, and have proven the concept works with actual data. This is not always possible with all industries, and so you may have to be creative in how you demonstrate this. For some businesses, it may make sense to take out a small loan to get you to this point. This then makes it easier to raise equity capital and optimizes your valuation since you are mitigating risk for the investor.
Some other pointers that we like to focus on in the overall capital raising strategy:
- Have a very logical and deliberative roadmap to demonstrate that every dollar raised is going to be used efficiently
- Make sure the investor has strategic value to add
- Don’t take the first offer you get
- Have a valuation done before you pitch to know your worth and where to negotiate
Best,
Lawrence Brown
Managing Consultant | AngelytiX Consulting