Startups
13 Things Every Startup Needs to Know About Raising Capital
Bluedot is a success story out of Melbourne that to date has raised a total of USD $3.1 million in the two years that they have existed. Their recent round of funding allowed them to raise USD $2.2 million and was lead by Jeffrey Katz who sold his company, Mercury Payment Systems, for USD $1.7 billion.
Filip Eldic and Emil Davityan founded the company and have managed to revolutionise location-based technology that has been previously been dominated by providers that have a significant drain on the smart phones battery. In short, if you’re building an app you can add their technology and be able to trigger actions to the user such as payments or advertisement’s based off a geographic location, without their privacy being breached and having any personal identifiers of that user.
The guys have had success in being able to engage large US mobile commerce applications and Big 4 Australian Banks. They also have successfully completed live trials of the world’s first mobile tolling platform on Melbourne roads as well as being able to present their technology to the likes of Microsoft and Samsung.
After having a chat with them, these are their top 13 tips that all startups need to know about raising capital.
1. Consider an incubator program before seeking serious investment
Before you go out trying to raise a large amount of money you should consider an incubator program first, where you will typically be given a sum of money that is less that $100k to test your idea. In the case of Bluedot, they saw this process as fundamental because they were trying to sell their technology to a large, slow moving industry in the early stages, which would have burned a lot of capital trying out the idea.
Being first-time entrepreneurs without the experience, the incubator was able to point out the deficiencies in their business model that then allowed them to pivot their idea very early on.
The only consideration, that startups need to be aware with these programs is that you usually have to give up a little bit of equity although Bluedot believe they wouldn’t be where they are without it.
2. Decide if the valuation investors are giving you is fair
Test the market and see what investors will be willing to pay you and expect investors to negotiate very hard with you. It’s also important to know what sort of equity they expect in return for that valuation of your business.
It’s not uncommon for investors to offer you half as much as your initial seed funding. Try and benchmark your startup against global averages that can be obtained from websites such as pitchbook. They produce quarterly reports about global raises and how companies perform in the Venture Capital context and then you can take their valuation, reduce it a little to be conservative and then put a valuation on your startup that is less than the average. The advantage of this is that you’re making it look attractive to investors at the same time.
3. Be prepared to say no to more investment opportunities than you say yes too
Often you will sit down with investors and everything will sound fine until you get into the term negotiations and then realise that their idea of what the companies worth is a lot less than yours.
In these circumstances, be prepared to walk away and to have to do this many times.
4. You will need to engage multiple sources of funding before you find one that will invest
For Bluedot, they contacted between 200-250 Venture Capital, private equity institutions, and individual investors before they found one that met their requirements – they did this on a global scale in Australia, USA and Asia.
“It’s a numbers, game like anything else. Get the word out and try as many different leads as you can until you convert to a successful one. “
5. Be methodical in what material you give out to potential investors
You need to have a pitch deck and a two pager for an initial approach. The most important thing is to have your pitch deck incredibly summarised and very much to the point. You also need your pitch deck to talk about what you do, where your market is, your traction so far and your unique selling point.
Bluedot found that in a lot of cases potential investors depended a lot on the covering email with the first couple of sentences. This must be good and to the point, otherwise you won’t get them to read your pitch deck or the supporting material.
As a second step, if the investor had gone through those two things then Bluedot would provide them with a complete due diligence pack which contained every possible, conceivable thing about the business such as employee agreements, insurance contracts, sales pipeline, product descriptions, business plan, information memorandum, shareholder resolutions, director resolutions etc. This would be provided to the potential investor via drop box so that it was very easy for them to digest the business in the due diligence phase.
6. Getting your staff to contribute their own capital is not necessary
This is important because some founders ask their own staff to assist in raising capital by investing their own money into the startup. Staff are an important factor to the startup but not when it comes to raising capital, the main investment you need from them is their time, although, before taking on new staff you should always get them to show some skin in the game first. This can be achieved by them working part-time, contracting to you or even working for free for a period of time. They need to show some sort of dedication.
All the people that put in the least and asked the most usually never have enough commitment to stay through the good times and the bad.
7. What you do with the money when you get an investment is important
The first thing you should do if you get an investment is put it into a high-interest account or term deposit and then crack a beer or two to celebrate after. Clear a lot of the liabilities and get up to date with your bills so you have clean books.
The obvious thing to note is that investors will usually put something in the term sheet to stop you withdrawing large amounts of cash without board approval.
8. There is not that much difference between raising the money locally or overseas
A lot of startups focus only overseas when raising money, but it’s worth looking locally as well. For Bluedot, they were firm believers in raising money locally as well and successfully raised $1.1 million before they went offshore. Be prepared though that if you attract overseas investment, you could be asked to move the company over there. Whilst it’s not a must to do that it’s worth being able to know how to answer the question if it does come up.
If you are looking to the popular USA to raise capital one difference that you will see is that because they are fairly experienced in the capital raising industry, compared with other countries, their questions about your startup will be very direct and a lot better thought through. This means that you need to think through the aspects of your business a bit more.
The biggest goal with these conversations is to get to the first meeting and then sell your heart out. If you have done this successfully then hopefully you will get someone who buys in on the vision of the business.
The raising landscape in each country can be very different though. For example, in Australia its very easy to get up to $1 million or $5 million plus if you have the right business metric’s but if you’re trying to raise money around the $1-5 million mark it can be very challenging, so your better off going overseas for this level of funding.
9. Understand what investors are looking for in your startup
They are generally all fairly similar and are looking for where they can put their money and get the biggest return with very low risk. Things that can affect their decision are your team, current traction, the product, history and ability of the company, the size of the market and the competitive landscape.
You should never just rely on one of these and make sure you hit every aspect.
10. Give the investors a really good demonstration of your product
You absolutely must demonstrate your proposition and features in a simple way to investors so that they can relate to how it works and feels, without them having to go away and test it out for themselves. This is an important point because it can often be hard to demonstrate what your startup does and for Bluedot, their technology is not always easy to explain.
A great thing that the BlueDot team did was to use Webex instead of doing a Skype call with overseas investors so that you can share your desktop with them and really demonstrate the whole offering effectively.
11. The way you deliver your pitch to investors is important
Before you go the meeting you should spend some time, in the days leading up to the pitch, to read about the fund / investors / venture capital firm and where their focus has been. The focus of the fund is very important because your not just getting money you’re getting their expertise, their connections and their experience instilled into your business. On the day of the pitch you must make sure that your confident and fully prepared as winging it will most likely see you fail.
The first part of the meeting should be you asking them about where the focus is, what their previous successes have been and what they don’t like to see and then that immediately shapes what you’re going to tell them in your pitch that follows this conversation. The types of things that they might focus on could be customer acquisition metrics, intellectual property, servicing enterprise level clients or the market.
The first part of your pitch should be a short, concise, one-sentence summary of what your startup does and the benefit that you deliver. Then go into the rest of your presentation from there with demonstrations, etc.
12. Partnerships are important and will get you bonus points with investors
The partnerships are important because they provide you with extra revenue streams and eliminate some risk that investors might perceive by diversifying your fundamental business model.
A quality partnership with an established organisation can also show credibility and that someone else has confidence in your business so much so that they are willing to align their brand with you. Bluedot were able to demonstrate this to investors with companies like Braintree, who they had partnered with.
The only caveat around having this conversation with investors is that you must be able to clearly proof to them that they’re beneficial relationships and how the actual revenue streams work.
13. Demonstrate to potential investors the small wins early on
One thing that’s important to grasp when trying to raise capital, is that investors want to see a few wins early on. In the early stages, you need to run fast and try and win the business that is the low hanging fruit. This will allow you to raise the money so that you can chase the large, slow moving companies later on.
The typical sales cycle, to win a large business like a bank, is 1-2 years and so if you only have small amounts of capital, you can’t afford to waste time chasing these prospects early on. Investors will not be impressed if you tell them that you haven’t won any clients and that you are focusing on a few large sales that may or may not happen down the track.