As sure as night follows day, your business will have to consider raising capital at some stage. Maybe you need funding to kickstart a business idea, or you’re scaling up or transforming your organisation. Either way, extra capital is a must to execute your strategy successfully. But before you take the plunge and start looking for investors, we recommend you run through our handy five-point checklist.
1. What are your goals?
Pinpoint what you want to achieve from a capital raise. Develop a clearly defined strategy and detailed business plan on how you will use investor capital. Working out how much capital you need is part and parcel of the goal setting and business planning process. Tempting as it may be to take a ‘go big or go home’ approach, it’s not your best course of action. Aim to only raise the capital amount you need to meet your business goals instead. Map out how and where you’ll deploy this funding within your business over an 18-24 month timeframe. Before you move forward with a capital raise, you’ll also need to have your business valued. We recommend getting your valuation carried out by a certified third party, even if it’s early-stage. A valuation by an accredited expert will carry more weight with potential investors. Your valuer also provides an objective view of your business. This is especially beneficial for founders, who put their heart and soul into their ventures. Valuers, on the other hand, are neutral and dispassionate, so they often include elements of the business that founders might undervalue or even overlook.
2. Is your business ready for a capital raise?
Timing is everything when it comes to a capital raise. So before you make your move, take a cold hard look at your business and ask yourself whether now is the right time to bring in investors. Radium Capital client and construction robotics pioneer, FBR, did exactly that. The Perth-based innovator concluded that completing additional R&D before its next funding round to further prove its technology would be crucial for the company’s long-term success. As a result, the business delayed its capital raising plans by a few months. Another factor to consider is whether you have the resources required for a capital raise. Raising capital is a time-consuming process. If you’re busy working on documentation, pitch decks and researching potential investors, that’s time spent not running your business or working on R&D. It’s also important to look at timing, not just from a readiness perspective, but also from the standpoint of when your business would either most need or benefit from investor capital. You don’t want to end up with insufficient cash flow, then have unforeseen situations arise or your business fold before an influx of funding arrives. So make sure you understand the timelines involved for each stage of the capital raising journey.
3. What are the risks of investor capital?
After investing precious time preparing your company and pitching to investors, there’s a high chance your efforts will be in vain. Less than 1 per cent of businesses seeking venture capital succeed. ¹And if you do catch a venture capitalist’s eye, you’ll need to consider the consequences of accepting investor funding for your business. While you don’t need to service equity capital with principal and interest repayments, it comes with other strings attached. The real cost of equity lies in its dilutive effect on the ownership of your business. Many founders underestimate the impact that giving up part of their ownership will have. The devil is the detail when it comes to the terms on which your investors agree to fund your business. Make sure you’re fully across the fine print of what your backers expect in return for their support. How are they mitigating the risk exposure of investing in your company?
What could your failure to deliver the growth and return on the investment they require mean for you and your team? Know the answers to these questions before you agree to accept a proposal from a potential suitor.
4. Which investors are right for your business?
Just because successful capital raises, especially involving venture capitalists, only happen to businesses once in a blue moon, don’t be tempted to start scraping the bottom of the investor barrel. Remember your business is of value. Take comfort from the fact that even a unicorn like Canva was rejected by more than 100 investors in the early days. ²Besides, any investment deal you strike needs to be a good fit for your business. Your backers, after all, will have a major say in how you run your company. And, if all goes well, they’ll be with you for the long haul, so it’s important to find the right fit. Think beyond the dollar value and consider what else a potential investor can bring to your organisation. Do your research. Identify which investors would be a good match for your business and ask other companies they’ve invested in about their experiences. Only keep investors on your shortlist that tick the right boxes for your organisation.
5. What are the alternatives?
What if your business needs capital, but the timing isn’t right, or you can’t commit the resources required to court investors for a successful funding round? You could consider equity-based crowdfunding services such as Birchal or Kickstarter for smaller capital raises. And don’t forget, investor capital isn’t the only type of money available. You can still raise funds using a debt facility such as a bond or a loan. But getting access to a traditional bank loan can be easier said than done and bonds are often only an option if your business already has existing investors. This is where alternative finance can help. If you have research programs that qualify for the R&D tax incentive, then R&D financing — a type of alternative finance — is an option. R&D Advances such as the Radium Advance from Radium Capital are loans that give you early access to your R&D refund. This form of financing is non-dilutive and allows you to tap into money you’re ultimately going to receive and repay through your tax refund. Used strategically, regular Radium Advances can generate additional tax refunds, so you can add to your R&D budget for the same annual expenditure or reduce your R&D capital outlay instead.
If you’re interested in accessing a cash flow boost or making your company’s R&D budget go further, call Radium Capital on 1800 723 486 or request a call from one of our friendly R&D finance experts today.
[1] Fundera by nerdwallet, 2020: Raising Capital for Startups: 8 Statistics That Will Surprise You. [online] available at: https://www.fundera.com/resources/startup-funding-statistics
[2] Entrepreneur Asia Pacific, 2019: She Was Told ‘No’ 100 Times. Now This 31-Year-Old Female Founder Runs a $1 Billion Business. [online] available at: https://www.entrepreneur.com/article/310482