Monthly Archives: September 2022

According to a recent survey, approximately 9 out of 10 business startups fail in the first year, and one of the most common reasons for this is a lack of funds. So, are you wondering whether it is the right time to raise funds for your startup? The answer will be different for every company. The first place to start is to ask yourself what you need the funds for, and then decide which funding option is most suitable for your business. If you’ve decided it might be the time to raise funds, then here is your guide to tackling the question of capital raising.

TIMING IS EVERYTHING

In business, timing is everything. Many people think timing is down to luck, but nothing could be further from the truth. If you can harness timing to your advantage, it is a critical success factor in terms of establishing sustainable operations and growing your startup. If you are considering whether it is the best time to start raising capital, it’s time to ask some direct questions:

• Have you run out of cash to continue to self-fund your startup?

• Are you reluctant to risk your personal assets, such as leveraging a home mortgage?

• Are you looking to avoid additional risk by using new lines of credit?

BOOTSTRAPPING

Don’t just raise capital because you are a startup. It should be because you want to increase the value of the business and facilitate growth. Bootstrapping may be a better option if you are already growing well from existing and projected revenue from your customers or clients. Cash from external investors may not be the best plan in this scenario, as they will dilute your equity stake. Bootstrapping also gives you time to build traction, gain higher valuation, and demonstrate growth.

However, if bootstrapping is not an option, and it’s definitely time to raise funds, its important to make sure you are in a strong position to attract investors. Make them feel that they will be missing out if they do not invest in your startup. Consider raising funds when you are celebrating a business win or milestone that you can boast about to a potential investor.

Related: Capital Gains: How Digital Entrepreneurs Can Master The Essential Art Of Fundraising

WHAT DO INVESTORS WANT TO SEE?

Ready to start pitching to investors? Building a basic financial model for your startup is crucial. This model will provide a roadmap in terms of cash required for your next business milestone and future business targets. You will also be able to pinpoint your short- and long-term capital needs.

Understanding your startup’s growth, projections, and legal structure, delivered in a punchy pitch, is also important. Investors will need to understand your vision, projected growth and opportunities, and legal structure they are investing in, delivered in a concise and engaging pitch that they won’t forget.

CHOOSING THE RIGHT INVESTOR

Investors provide a vital monetary injection, but they can also bring fresh ideas, concepts, and their unique life experiences to the table. Key questions to consider when choosing an investor include:

• Can friends or family meet your funding requirements?

• Do you need a more significant investment via formal series rounds?

• Would your business benefit from a professional network, including legal and financial professionals as well as an inspirational mentor?

• Does your investor provide opportunities for growth and expansion?

Successful startups typically have a network of industry professionals they can reach out to in order to support them through the development period. In the UAE, this includes investor communities, startup hubs and angel investors. Tapping into these resources will help you answer these questions and choose the right funding option for your startup.

So, how can startups structure their raise? Here are a few options:

FAMILY & FRIENDS Many startups look close to home by raising capital from family and friends. This funding route is pretty common in the early stages of a business startup, but it can also be an option in later stages. Your family and friends will be emotionally invested in you, and they are likely to value your success over any returns on their investment. However, making sure you give them a fair deal is important, as they are not professional investors.

ANGEL INVESTORS Networking will help you meet angel investors, who typically invest smaller amounts of capital into various startups. Angels will have different goals, possibly rapid growth or cutting-edge projects as well as risk-adjusted returns, particularly in the current economic climate. Focus on developing a demonstrable product or service, strong support team, and well-thoughtout financial plan.

INSTITUTIONAL VENTURE CAPITALISTS (VCs) Approaching a venture capital fund may be the best option if you have left the seed round, and your business is still growing. VCs can provide a large-scale investment in exchange for an equivalent level of control in terms of your business. Attracting an experienced and visionary VC requires the ability to demonstrate rapid growth, traction and the potential for scalability.

CORPORATE VENTURE CAPITALISTS/INVESTORS Many larger companies directly invest corporate funds into external startup companies. They operate in the same way as institutional VCs, but often tend to invest in companies they wish to acquire in the future.

OVERSEAS VENTURE CAPITALISTS Seeking out international investment from the US, UK, and Europe can offer you limitless possibilities in terms of market size and capacity. This typically happens once you have moved past the development phase to the later stages of funding. A good approach here is to look at your future target market, and network with international investors in this industry. You also need to consider the difference in legal systems, particularly in terms of due diligence and business negotiations, as well as addressing cost and tax implications of a potential relocation to the VC’s country of origin.

THE LAST WORD

Raising capital is an exciting time for your business. Embrace this challenge as you take your business forward to its next stage of growth and development. When raising capital, you need to determine:

• Current levels of risk

• Growth projections • Structure of the raise

• Investment terms and the level of investor control

Critical to your success will be the ability to connect with the right professionals who can share your vision, and deliver the right type of expertise.

Over the past few years, the UAE has become a rising star in the global market, attracting wide-ranging businesses across diverse sectors, and sending a strong message to global investors, business owners and companies. The strategic location connecting East to West, its rich growth opportunities, and its impressive response to COVID-19 crisis is one of many reasons the UAE is the #1 global destination for business startups.

Embarking on your startup journey is an exciting adventure, but you are often balancing the learning process with looking to the future in terms of growing and expanding your business. It’s difficult to juggle these equally important priorities, and easy sometimes to drop the ball. Here we have the top six tips to help you avoid some of the most common mistakes we have seen startups make in the UAE:

1. Create, evaluate, and refine your entrepreneurial roadmap Establishing a business roadmap for your business is vital. Firstly, it’s important to have a clear vision in terms of what problem your product, service, or technology solves. Understanding customer needs is the driving force here. Many entrepreneurs have created amazing products or services that they think provide a solution, but if your customer doesn’t need it, then they aren’t going to buy it. Investors will also be looking to see whether your business can scale up and provide them with increasing returns, so your roadmap needs to factor in plans in terms of your future growth and expansion. Start small, building a product concept that works for your target market, then shape this by identifying any issues and opportunities to optimise your concept.

There are various exit strategies that you can factor into your business roadmap. You may consider a merger and acquisition (M&A) deal. This is a great way in which startups can bundle up their services and sell to potential investors. The transformation of a company via a merger (either vertical or horizontal) also provides an opportunity to target a larger market share. An initial public offering (IPO) is another option. This offers the most liquid funding source to a company -the public markets- as well as providing a boost to your corporate identity and public profile. However, you need to balance this with the fact that the market reacts quickly to bad news, so be prepared for this eventuality. There are also cost implications in terms of upfront fees and ongoing compliance costs.

Successful entrepreneurs don’t repeat their mistakes, they simply learn from them. Monitoring your performance and being able to adapt your strategy and roadmap is vital. Typically, client acquisition rates, revenue and profitability should be measured, but also look at the bigger picture in terms of return on investment, cost control, audit performance and customer retention levels.

2. Choose the best corporate structure There are many ways to structure your business, depending on your business goals. The business infrastructure you choose impacts your legal risk, tax obligations, level of asset protection, and legal costs. Choosing the right structure early on ensures that you save both time and money in the long run.

Consider where to set up in terms of location. Does a mainland location offer you a better option in terms of trading with the local market? Is a freezone more cost-effective and flexible in terms of tax exemptions and zero-currency restrictions? Perhaps starting an offshore entity is a great way to expand operations, without any heavy administrative obligations?

Your corporate structure is also important. Holding companies offer the benefits of asset security, centralized control and flexible growth structure. An operating company/subsidiary takes on the trading responsibilities and day-to-day running of the business, including contractual obligations. This means that if a customer has a claim against the business, the claim will be against the operating company. Think carefully about the goals of the business in terms of protecting assets and mitigating risk.

Finally, identify if you need a more flexible structure that is suited to startups operating across multiple lines and verticals, or a more consolidated approach that will enable the achievement of expansion plans across the region or globally. The solution is for businesses to find a balance between flexibility and structure- enabling them to reach their full potential and maximize their footprint.

3. Establish the right team, and mitigate risks Henry Ford’s quote, “If everyone is moving forward together, then success takes care of itself,” sums up perfectly the power of teamwork. When you start up your business venture, it’s very easy to fall into the trap of doing everything yourself to avoid spending money, and so, eventually, you burn out. The point to remember is if you don’t create a team you can delegate to, it’s difficult to maintain increased productivity, client satisfaction, and overall business success. Establishing the right team, and inspiring them to work together to execute your vision, and be part of your success is critical.

Don’t rule out outsourcing as another option. Outsourcing can give you the benefit of more time to focus on your core business activities, improved cost-efficiency, and flexibility to increase resources. Ensure that you appoint reliable firms aligned to your vision, and are able to represent your brand as if it were their own.

Most importantly, whether it is an employee or outsourced services, ensure you have a robust employment agreement or service level agreement (SLA) with providers to mitigate the risks of competition, conflict, or non-performance, and avoid losing money or potentially suffering any reputational damage.

4. Avoid raising funds too early Timing is everything in business, and being patient and conservative with your fundraising strategy is actually likely to secure you more funding. So, when is the right time to raise funds? We recommend when you have a proof of concept, gained some traction in your market, generated revenue, and secured brand recognition. It is your job to convince an investor that you are the next big thing and worthy of their investment. Deliver a refined business model or product offering that is scalable with the right investment, and make the investor feel like they are missing out if they don’t jump on board.

Many entrepreneurs fall into the trap of blowing all their money before they have even started; for this reason, only a small amount of startups ever make it big. Bootstrapping may seem a tough prospect, but developing your company without external funding is an invaluable business skill. Building your startup with minimal resources and lean approaches will make you appreciate the value of capital when you do secure the funds. You will also avoid the nightmare of dealing with angry investors!

5. Avoid giving away too much, too soon, by managing your cap table As a founder, you should consider how an investment will impact your shareholding as well as the dilution of the percentage of your ownership. It is important to evaluate what you really need in terms of funds, before giving away too much equity. Remember, you are the one who is putting their heart and soul, along with a lot of blood, sweat, and tears, into the business, so it makes sense that you retain a high level of control in the early days. Further down the line, you will inevitably have less control, but at least, at that time, you will be rewarded in terms of negotiating a higher price.

An easy way to mitigate against excessive dilution is to have a cap table, which is essentially a spreadsheet listing all the companies shares, investors, and indicates percentage of ownership in the company, as well as showing dilution over time. We recommend cap tables be created first before other documents to help you in negotiations with investors, and assessing the impact of your deals. Be prepared for cap tables to become quite complex after a few rounds of financing.

6. Use professional help It’s easy to draft your own legal documents, use online templates, or sign agreements without checking the fine print. The impact of this may not be much at the beginning of your startup journey, but down the line, you could encounter difficulties in terms of an exit event, business termination, or liquidation. Correctly executing a legal document is a formality, but it is key to creating a legally binding arrangement and avoiding disputes or risk of a court finding a contract unenforceable, or not legally binding.

Navigating startup challenges and obstacles may seem daunting, but following reliable and professional advice will help you avoid time and money in the long run, and avoid mistakes your predecessors have made. Establish your goals, seize the day, and take action. The exciting part of business is the unknown and the opportunity to continually learn and grow across your startup journey.