Cameron Taylor – Partner at Minter Ellison Rudd Watts facilitated a Capital Education workshop in partnership with Soda Inc & Callaghan Innovation to help business owners have a better understanding of New Zealand's capital raising landscape in Hamilton earlier this month.
The workshop was attended by over 30 entrepreneurs, business owners of small and medium sized enterprises all looking to raise capital.
Cameron said there were many sources of capital starting with yourself, friends and family.
Others he highlighted were the obvious traditional lenders (banks etc), crowd funding, incubators/accelerators, professional investors (portfolio approach), venture capital, investment companies, private equity, or even the share market.
Cameron said finding the right investor “is like finding the right gym instructor, you look for someone with the same values, someone with experience in the industry, someone looking to build the company up and not takeover”.
But, he said, raising capital came with various laws/legislation.
“You can’t just advertise to the general public that you want to raise capital. Lawyers and accountants are key sources to make sure you comply.”
He said you had to figure out what you want; money, governance, access to networks, business development, commercialisation, globalisation, and support with further capital raising are the usual things businesses want.
And then, he said, it came down to what you need.
“You need an honest value proposition, a valuation starting point, a compelling pitch, a business plan, a capital plan, and a detailed understanding of investor expectation.
“Valuing your business is a mixture between selling yourself and building credibility,” he said.
Cameron said investors’ appetites changed with the economy so it’s best to always be authentic to your company. He said over selling and under selling yourself could be equally bad – it’s better to be honest in your position.
“Another thing you have to do is due diligence. Before you look for investors make sure your business is built on solid ground. Do you own your IP? Or physical machinery, etc? What’s the foundation the business is built on? Is it sound?”
Cameron said the most important thing to have in order when looking for investors was your “elevator pitch”.
“Practicing is critical. You need to practice your pitch so you are focusing on how you’re saying your pitch, not what you’re saying. You are much more important than your idea.
“Some investors won’t like your idea, but they will like you and sometimes they will bring you on to a completely different project because they believe in you as a person, rather than the idea you originally came in with.”
Cameron said capital tables were often overlooked, but were the cornerstone building block for you to understand as a founder how much ownership you had in business and for the investor to realise who they were getting into bed with.
“All capital tables are very personal, there’s not one template for everyone.”
He said term sheets were important because they were the agreement on how the capital was being used, paid back, they outlined timeframes and more.
“Common mistakes we see with investors on term sheets – they negotiate, and then go to their lawyer and ask for them to write up a document – but they have already signed it."
For the business owner's protection, Cameron believed they couldn't afford not to speak to a lawyer to get advice on term sheets before they signed them.
Common capital raising mistakes:
Timing: Companies and founders leaving it too late. Proper timeframe – should be starting to raise when you have at least 6 months of income in the bank. Should also be looking to raise enough to keep 18 months to 2 years of runaway.
The Right Type of Investors: Approaching wrong investors for where your company is at in its growth stage. Should focus on who they are and who are the most appropriate. Early stage – don’t talk to later stage investors. New Zealand is very small, always approach ones that match with your business.
Valuation Expectations: Being unrealistic about valuation. Don’t want to see a down-round. Don’t give too much of your company away at an early stage either.
Understanding the Deal: Investors not understanding the deal terms that are associated with growth capital raising rounds. Linked to valuation issue. Americanisation of term sheets. If you are taking growth capital, you can’t afford not to get a lawyer’s advice.
Managing Investor Communications: Investors shouldn’t have access to Xero or cash flow information. But also, shouldn’t be kept in the dark. Proper level – two monthly update to investors. 4-5 pages covering a range of financial and other metrics that underpin the business; revenue, customers, cost to serve etc.
“The easiest investor is your existing investor – you need to keep communication up and maintain a good relationship,” Cameron said.
Nine things to include in a pitch:
Problem – Be precise and specific
Solution – Short wrap
Competitor analysis – How is it relevantly unique to other products out there?
Timing – Why is your product needed now and relevant to the market?
Investors invest in people – This can be 50% off the equation. A passionate delivery of a pitch and how you deliver it will aid the buy in. Always. What’s unique, special and innovative about you and your team?
Validation – Understand that there is a market – show the evidence and talk about it. Show you have talked to real people who are prospective users of your product/solution. Know their pains and verify that your product can solve these pains. What would you pay for this solution? This is important
Money – Business model. How are you going to make money – in terms that anyone can understand? Software as a service? Licensing? Advertising?
Investor ask? More clarity around this shows you know your product and path to get this off the ground. How you see that relationship going
Risks – showing what you have done to de-risk the proposition. There will always be risks with every business and idea. If you can show you have de-risked some elements already and have identified some possible risks ahead, this shows investors that you can and are working towards some form of milestone and can execute
ABOUT CALLAGHAN INNOVATION
Callaghan Innovation is New Zealand’s innovation agency. It helps ambitious businesses of all sizes grow faster, providing a range of innovation and R&D services. www.callaghaninnovation.govt.nz.