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Are you looking to raise capital to fund a great idea or launch the next stage of your business’ growth? Not sure where to start, or how to best prepare for the capital raise?
OnMarket is here to help! Whether you’re looking to raise capital for the first time in a pre-seed round or an experienced “capital raiser” looking at a pre-IPO round, the following six questions are a must for any business seeking to raise external capital.
Question #1: Is my company ready to raise capital?
Raising equity for your business is a time consuming process. It can take weeks of planning and preparation. It also means that you will become accountable to new shareholders. You must be confident that you, and your business, is ready for the increased workload and the ongoing obligations to shareholders. For more information on this part of the capital raising process, check out our investor ready checklist.
For early-stage companies, a key part of this process is also asking: is my business investible? An investible business must have a clear direction, and a product or service with a unique value proposition that is attractive to investors. For example, it might be attractive because it disrupts an established market, makes an existing process more efficient, or introduces an entirely new and innovative product or service into a market.
Question #2: How much money does my company need to raise?
It’s always a good idea to consider the amount you would like to raise from investors well-ahead of your capital raise. This amount is often based on your specific business needs and your company’s growth strategy (see question #3 below). We recommend planning for a range of outcomes via a minimum and maximum target amount. Why? Because this provides flexibility during the capital raising process, and prepares you for different outcomes. Don't forget, when considering the amount you want to raise, you are effectively balancing:
How much equity you are comfortable giving away
The amount you will need to suitably fund your growth strategy
The number of new shareholders you are willing to bring onboard
On this point, it is important to note that under the Australian Crowdfund-Sourced Funding regime, a company is not able to raise more than $5m in any given 12-month period by way of an equity crowdfunding offer (even if this is over multiple ECF rounds). From our experience, the sweet spot for an ECF offer can fall anywhere between $200k and $1.5m. If you want to learn more about the equity crowdfunding regulations in Australia, click here.
Question #3: How will my company use the money raised?
This should be considered alongside your brain storming to Question #2. Raising money just for the sake of raising money is a waste of time, resources, and unnecessarily dilutes existing shareholders. It’s therefore crucial that your company has a clear understanding of where it will deploy the funds raised. Investors want to see a clear runway to sustainable growth - so make sure your company has a strong, data-driven, actionable growth strategy. This strategy will inform which parts of your business need the additional capital investment and will help you prioritise where funds should be allocated.
From our experience, some of the business areas where companies frequently deploy funds include:
Development of technology
Expansion of existing manufacturing facilities
Research and Development
Sales and Marketing
Working capital
Offer costs
Ultimately, the allocation and use of funds will depend on the nature of your business, the industry, and what stage of growth your company is currently experiencing.
Question #4: How much money is my business worth?
Determining your company’s valuation is often feared as a notoriously tricky exercise. And rightly so. While you don’t need a precise number at the initial stages of the capital raising process, having a good understanding of how much your business is worth (and why) is a crucial aspect of making your company investible. As the capital raising process progresses, investors will want to know how much equity they are receiving in return for their investment... and determining your company’s valuation plays a key part in this.
One way to determine your company’s valuation is to look to similar companies in your industry. To provide some guidance on how to begin your research, the following list of questions will help identify companies that most closely align with yours:
What industry does your company operate in?
What geography/markets does your company currently serve?
What are the products/services that your company provides?
Is your company generating revenue? How much? Is your company profitable?
What stage in the business lifecycle is your company? Are you seeking pre-seed, series A, pre-IPO funding?
Once you have identified a small list of similar companies based on these questions, research the reported valuation of each company based on their last capital raise. This will form a rough guide as to how much your business may currently be worth. Please note, this should only be used as a starting point and further valuation analysis may be needed.
Whatever number you land on, be sure you're armed with research and a well thought out explanation... just in case!
Question #5: What type of investor best suits my company and its future?
This question is often overlooked, but it is a crucial one as it highlights the various sources of capital available to private companies. Avenues of capital raising includes venture capital, private equity, family offices, angel investors, and retail investors. It is important to assess the benefits and disadvantages of each type of investor and decide early-on which source best aligns with the amount you want to raise in this round, whether you need passive or active capital, and the structure of your capital stack and stated business strategy.
At OnMarket, we specialise in helping companies raise capital from all types of investors, whether it be assisting your company attract venture capital investment, raising capital via a wholesale round from our Capital Club members, or undertaking an equity crowdfunding raise from our platform of over 60k retail investors.
Question #6: What are my exit strategies?
While thinking about potential exits before raising capital may seem pre-mature, it is an important part of any clear and actionable growth strategy. Not only do investors want to know when they will be able to realise a return on their investment, but having a rough idea about a potential exit timeline makes your company more investible and shows that you’ve really thought about the company’s future.
As a general guide, a potential shareholder exit from a private company could occur via a trade sale to a strategic buyer, a share buyback, an IPO or further Venture Capital investment or Private Equity buyout.
Although a substantial amount of planning is needed for a capital raise, it is a worthwhile experience that gives your company the runway to grow. If you are considering capital raising, and need some assistance deciding which avenue is best for you, get in touch with OnMarket here.