It’s a reality that capital raising for start-ups remains challenging in Australia. And while there have been some good initiatives in this space, such as favorable legislation and tax incentives a wave of new incubators, many high potential start-ups are starved for funds and in particular ‘smart capital’.
The majority of sophisticated investors are actually quite risk averse and there are only a small number of genuine angel investors in Australia who are prepared to write a significant six or seven figure cheque to back a start-up business.
Investors want to see they are not going to lose their money, and then they want to see a return on investment. They are rarely swayed by blue sky numbers and forecasts. Tell an investor you are building a billion dollar company before you have even generated $1 and you will see their eyes glaze over.
So how do you get funded? How do you increase your chances of securing a significant investment into your company? And, what does accessing “smart capital” have to do with all of this? Before you even get to the point of securing potential investors, you need to get your house in order.
Believe in your business
First and foremost, you need to be building a great business that you genuinely believe in. Don’t hedge your bets. If it’s the right opportunity put all of your efforts into that business. Refine the business plan, get your IP registered, secure patents, get your strategy right, get proof of life and don’t get distracted with other ventures or back-up plans. As soon as you have a back-up plan, you are acknowledging that you believe your business venture could fail.
Don’t take in investors if you are not 100 per cent confident you are going to succeed. Investors back entrepreneurs with proven track records and who are focused 100 per cent on their business venture. You must demonstrate you have the right business model and strategy combined with the ability to execute on your plans.
Get proof of life
Getting proof of life is critical and you need to build a business model that can demonstrate revenues and profitability within a reasonable amount of time, usually one to three years.
There are too many early stage businesses in the market which don’t show profits and therefore returns to investors for many years, sometimes even a decade. If this is the type of business you are building and growing, get some good advice as it will be very difficult to fund, especially in terms of seed and early-stage capital. You may need to refine your business model.
Raise ‘smart capital’
Focusing on raising ‘smart capital’ initially will help you access not only the money, but the smarts which will help you grow your business and execute on your plans.
Smart capital is money from an individual or group of individuals who can help grow your business in some way, such as via their experience, knowledge, mentoring, advice, accessing their business networks or providing some value above and beyond the cheque value.
Bringing in smart capital via an investor advisory board serves three purposes.
- Access to critical seed capital – it brings in the seed capital that you require to expand the business, hire resources, further enhance your IP, register patents, test the market, run a pilot and gain even more compelling proof of life metrics and results.
- Talent and expertise – it brings in expertise that can help you grow, refine your business strategy, and at the same time, manage risks and avoid unnecessary mistakes. It may help bring in high profile individuals who can open doors for your venture and win new business. Ideally you want to try and secure at least one entrepreneur on your board who has successfully grown a similar business venture – this carries a lot of weight in a market which is filled with early-stage businesses wanting to fund their bright ideas with other people’s money.
- Give sophisticated investors confidence in your venture – down the track when you raise larger amounts of capital, it will give sophisticated investors confidence in your business venture and comfort that there are other advisors and board directors with ‘skin in the game’. This may help address concerns that they may have about losing their investment and/or not achieving a satisfactory return on investment.
Many businesses with an injection of $1 million combined with smart talented advisors and directors may never need to raise larger amounts of capital. They may be able to self-fund and grow the business effectively without even having to approach private equity and venture capital firms. Sophisticated crowd funded ventures are a perfect balance of securing funding and expertise and it could be the solution for your early-stage business.
Kylie Hammond, CEO of Director Institute, is a leading board and executive search and board talent management consultant and Australia’s foremost CEO business mentor. She is passionate about helping executives create portfolio careers which can include a main employment contract, combined with not-for-profit work, board appointments, speaking and coaching or mentoring engagements.