The Legal Corner: To Raise, Or Not To Raise? A Lawyer’s Guide For Entrepreneurs Seeking Funds To Grow Their Startups
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?
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.