Trellis' President of Private Transactions, Dennis Crowley, recently sat down with Tom Miller,...
Preliminary Capital Raise: 3 Best Practices You Need to Know
Raising capital plays an important part in growing your organization into a successful venture. It can be challenging and time consuming, but there are a few practices that can help to make the process much more effective for your organization. And now it is more critical than ever, as Crunchbase reports that venture capital funding went through the roof in the first half of 2021, with more than $288 billion invested globally and just under $400 billion invested from July 2020 through June 2022.
Raising capital is a long and ongoing process that will likely need to be planned and managed continuously. Regardless of your organization’s size or stage of growth, it’s vital to sharpen your skills right from the start. Utilizing these three best practices will help you get to where you want to go at a quicker rate.
Identify What Stage of Investment You’re In
It’s important to understand where you land on the investment scale and what type of investor best suits your organizations’ needs. Take time to weigh the amount of funds you need now against the valuation you want to set for the round. Taking more money than you need now sounds great, but you could lose a lot of equity if the round is undervalued for the long term.
Are you a startup company and just beginning to look for capital or only need a small seed amount of funds? Perhaps reaching out to friends and family or looking into government funding is your best bet at this point. Are there non-dilutive grants or small business investments that could help get you started?
If you’re in the beginning stages, you might also consider crowdfunding. A way of raising money from large groups of people, posting your opportunity on a crowdfunding platform can get your offering in front of thousands of potential investors.
In crowdfunding, several private investors each pay a small amount of money to support a project. According to Statista, as of 2016, this type of alternative investing had globally raised $738.9 million in U.S. dollars.
However, if you’ve been around for a while and have higher levels of return and risk, you might want to think about angel funding or even venture capital.
Understanding your particular investment needs and what stage of the game you’re currently in will help you find the best financial fit and serve you better in the long haul.
Reduce Your Perceived Risk
If investors believe your risk to be high, the amount of capital you receive will be lower or the valuation will be set lower. As most investors base how much money they’ll invest in an organization on their supposed risk factors, it’s in your best interest to do what you can to lower those components.
Attempt to reduce your perceived risk by showing investors the following:
- You have a well-developed business plan that displays your ideas and vision for what you’re pursuing
- Have a fully built-out data room with complete answers from an institutional due diligence questionnaire (DDQ)
- You’re in control financially and always meet your cost projections
- You have previous experience growing companies from the ground up
- You’ve studied the challenges that your competition has faced and learned from their experiences
- You know your industry, competition, and the market-share capabilities
- Companies in your industry that have made money for their investors from similar products/solutions
Know Your Pitch
It’s important that you understand, and can talk to, the problem you’re trying to solve in your industry and what your game plan is for doing so.
- What makes your product/service stand out from the rest?
- How are you unique?
- How do you plan to use the funds received to gain investors’ return on investment?
- What are your organizations’ future milestones?
- How much capital are you looking for?
- Is your valuation measurable?
- What size is your target market?
Having a solid plan in place that answers those questions is crucial when it comes to capital raise. The bottom line is this: you need to know why someone should invest in you and be able to convey that knowledge to an investor as precisely and eloquently as possible.
Overall, the key to effective capital raise is to know who your target investor is, understand the exact what/why/how behind your idea, and then present that to potential investors while backing it up with data.