There comes a time when your business needs an injection of capital to get over that hump. The hump might be the viability test for your product; the road to earning revenue; or the boost to take your business to that next milestone. Whatever it is for your specific company, finding the best way to raise the needed cash is an important and often challenging task.
A conventional way to do this is to bring on a new shareholder. Here are four practical things to consider and implement to do just that:
First up, how do you practically raise funds by bringing a new shareholder on board? It’s important to understand that your company is raising funding. This is done by offering ownership to the funders in the form of shares. The ownership and value of the company is split into fractions (shares) – a new owner puts money into the company, and gets shares in the ownership of the company in return.
2Measuring your company’s value
The natural next question is: how much ownership does the new shareholder get in return for their contribution? Does a R 1 million investment get the new shareholder 50% or 5% of the ownership of the company? As you can expect, this depends on the value of the company before the investment.
How do you measure the value? Luckily, there are whole industries dedicated to doing this – with the essence being: Your company’s value depends on its ability to earn profits for its shareholders.
There are many ways to measure that, but you will essentially need to show a compelling argument of why the company can earn profits for its shareholders.
3The start-up challenge
This is where the early stage start-up company faces a real challenge. The start-up will often have little or no actual revenue – making it hard or even impossible to show a track record of earning profits for its shareholders. The challenge here is to show its potential to earn revenue.
Typically, this comes down to showing a great product, a great management team, reliable research into the size of the market or potential market, and how the start-up’s value offering can crack that market wide open.
4The investor’s risk
Once you’ve convinced an investor to buy 5% of your company for let’s say R1million rand, and you’ve given them a 5% shareholding in your company, what’s the next step? What risk does your investor take?
The starting point is that your investor is now a shareholder, so they take all the risks that you do. If the company fails despite your best efforts, the investor takes that risk and has no claim against you or the other shareholders.
It is common for sophisticated investors (think Venture Capital, Private Equity or Angel Investment Funds) to try and limit that risk. Common tools here include liquidity preference – which is a fancy way of saying that they get their investment back before you do, should the company become insolvent (that is if there is any cash back).
But what do you personally owe that investor in return? This is important – you as a director of the company will owe a duty to that investor to spend their money wisely, in the interests of all the shareholders. You owe them a duty to manage the affairs of the company prudently. You are now the custodian of someone else’s money and your goal is to build the value of the company so that you give all the shareholders a return on their assets. If you breach this duty, you can be held personally responsible for the shareholder’s loss.
Again, sophisticated investors can also require more from you – especially if you and your start up management team are essential to the growth and viability of the business. They can “lock up” your shares in such a way that you can’t sell for a specified period of time. They can also require your shares to “vest” over time so that if you leave before then, the company can take back your shares.
These and other tools are specifically intended to minimise the investor’s risk by motivating you as the founder and director of the company to stay and grow the company’s value.
Planning ‘life after the investment’
It seems obvious that you should prepare carefully for fund raising. It can be a time consuming exercise – but one you’ll never regret. It’s important to know what your potential investors want to see in order to agree to the value of your company.
Also, it’s vital to be very clear on what your obligations will be to the new shareholders once they come on board. Discuss both their expectations of you, as well as your expectations of them. Build the “life after investment” picture very clearly so that you know what your position will be afterwards.
In a nutshell – lay strong foundations with investors for a long term relationship in advance, and your company’s long term prospects will be much healthier.
When Attracting Investors Go Ugly Early
When it comes to attracting an investor, use the same strategies in the boardroom as you would in the barroom.
If you want to make money from your idea, you must be unique in your ability to execute it. Sometimes you have a great idea – a game-changing idea; an idea that’s worth a billion dollars – so you start thinking about how to make it a reality and you quickly realise that you don’t have sufficient capital, technical expertise and/or time.
At this point you’re faced with two choices:
Option 1: Be paranoid
Start worrying someone will steal your genius idea. Insist on NDAs before sharing. Start fantasising about selling your idea to a giant corporation that is so lethargic it would never be able to come up with your idea.
Option 2: Share
Start telling everyone about your idea. Share it on Twitter or Facebook. Tell the world!
Option 1 is a dead-end filled with losers. Option 2 carries the small chance that you get ten people who validate your idea and you can take the next step.
Option 1 deprives the world of your idea and leads to you muttering: “I thought of Facebook long before Zuckerberg,” whilst sipping a late-harvest semi-sweet wine with ice. Option 2 gives you a small shot at being part of a bigger story, and at the very least, gives the world a chance to benefit from your idea, even if you enjoy no financial upside (or credit).
Get screwed early
If someone steals your idea and makes a success of it, tough luck. If your contribution is not critical to the realisation of the idea, then the idea is worthless. At the very least, you can identify crooks early on. The world is full of crooks. Giving people an opportunity to screw you early is a great way to filter bad people from your life.
Build a track record
Okay, so you’ve got the idea. Now you need funding — you need a shareholder. First, you need a network. Cold calls rarely work. Investors work on personal references. With luck, your parents or your friends or your colleagues can plug you into a capital network.
If you weren’t born lucky, you have to make your own luck. The shortcut is to marry rich, although that usually results in long-term unhappiness.
The long route is: Go work at a reputable company, build a track record and strong relationships that you can leverage when you are ready to start your own business.
Go ugly early
Once you have access to a network, you need to attract investors’ attention. Getting the attention of an investor is a bit like finding love at a bar. If you’re like me and you always struggled to attract good-looking members of the opposite sex, employ the ‘go ugly early’ strategy.
The same strategy works when it comes to chasing funding. Instead of chasing the most attractive person in the room, head straight for the hunchback. This will save you time. Also, it will gain the attention of the most attractive person in the room. “That’s weird, why is that guy not talking to me? Everyone always talks to me!”
Here’s the thing: The key to the ‘go ugly early’ strategy is to be noticed. It’s no good chatting up the hunchback if Leonardo Dicaprio can’t see you doing it.
Close the deal
Okay, assuming you can attract interest, you need to close the deal. Get the basics right. Dress smart, have your forecasts on hand, be clear that you’re in it for the money (not to save the world). Most importantly, show your passion. People don’t invest in excel spreadsheets — people invest in dreams. Sell the dream.
If you don’t close the deal, don’t sweat it. Move to the next girl (or guy) at the bar. Remember, the best investors are hard to get. If someone seems too eager to give you cash, think twice. Easy cash is like easy sex. It normally comes with STDs…
Raising money is all about people. Be yourself and the right person will choose you. If you try to be someone that you’re not, you may find yourself in bed with the wrong person. And shareholding relationships are like the mafia: It’s hard getting in, but it’s much harder getting out.
Read ‘Be A Hero’ today
7 Important Differences Between Angels And VCs You Need To Understand
Keep these seven differences in mind before targeting and pitching investors.
For those of you looking to finance your start-up, raising money is one of the most daunting tasks you’ll ever face as an entrepreneur.
While you may understand the basic difference between angel investors and venture capitalists (VCs), you may not understand their similarities and differences enough, in order to pitch them effectively.
Building upon part one of this series, the following are seven key characteristics you should know about each investor type.
1. They have different backgrounds
VCs tend to have financial management or professional investment backgrounds. Angels tend to be former or current entrepreneurs.
While many VCs are former entrepreneurs, the majority of VCs come from an investment banking or financial management background, which influences the way they interact with and assess entrepreneurs.
Quantitative analysis of a product’s traction and its market will heavily influence a yes or no investment decision. Angels usually invest by leveraging their personal operating expertise as former entrepreneurs or business leaders. That background influences the types of industries they’ll consider and the individual entrepreneurs that inspire them.
2. They have different personal brands
VCs are generally public personas. Angels are often behind the scenes.
VCs are in the business of deal flow. They want to hear about as many start-ups as they can. To fuel this, they must be public and accessible. They’ll be active on Twitter, Instagram and popular blogs in order to raise awareness among entrepreneurs. VCs need to be veritable celebrities among entrepreneurs.
Angels tend to be more private and harder to find because they don’t want to be inundated by deal flow.
For most angels, start-up investing is a hobby that must be balanced with the rest of their obligations. If they’re too public, they’ll be bombarded by entrepreneurs seeking money. Sure, some angels will actively blog, Tweet or create an Angel List profile. But these people tend to be the most active investors.
Many angels aren’t digital natives, and the majority like peace and quiet; therefore, they won’t be easily found on social media. In some regions of the world, personal security is an additional component that urges angels to invest quietly. In these locations, if the public knows you are wealthy you become a target for crime.
3. They can both be jerks
There are just as many bad angels as there are bad VCs. Surly personalities are rampant in the investment world, so entrepreneurs will have the inevitable task of navigating bad investors.
In any city or industry, there will be both great and terrible investors. Some VCs will clash or undermine your decisions as an entrepreneur – and sometimes they’re justified – just like some angels will demand greater control or influence over your day-to-day than you should give.
Related: How To Get Venture Capital
4. They can both lead to bad deals in different ways
Entrepreneurs end up with bad deals from angels because the angels don’t know any better. Entrepreneurs end up with bad deals from VCs because the entrepreneurs don’t know any better.
Most VCs won’t deliberately try for non-market deal terms because word gets out too quickly. If entrepreneurs learn you’re a greedy VC, they’ll gossip and discourage their peers from approaching you. VCs also have a better grasp of how other funds and firms will examine a startup in future rounds of financing. The VC wants to structure their investment in such a way that it does not discourage future investors.
It’s more common to hear about bad investment terms from angels. If this happens, it’s frequently because an angel doesn’t know market-standard terms and/or doesn’t understand how non-market terms hurt everyone involved. Savvier angels know they must be fair with the entrepreneur if the company is to succeed in the long-run.
5. They have different amounts of liquid cash on hand
Money loses value if it’s not put to work; therefore, the money that angels and VCs invest is often invested elsewhere before it’s reallocated to a startup.
VCs generally don’t get 100 percent of their fund’s money upfront. Instead they must periodically issue capital calls to their limited partners (LPs), requesting their next tranche of money. Granted, since they are professionals, they will almost always have enough cash on hand to do their deal with you.
Angels, in turn, may need to rebalance their overall portfolio by selling some stocks in order to free up enough money to invest in your start-up.
Related: Venture Capital Definition
6. They have different impacts
VCs are more likely to crush your company. Venture funds must produce venture returns for their LPs. In order to achieve this, at least one or two of their investments must provide huge returns. We’re talking 30 times or greater return on a given start-up investment in order to counteract the fund’s bad investments – or failed start-ups. To do this, VCs encourage their startups to swing for the fences.
They push founders to spend big and take big, calculated risks if it has the potential to turn that startup into a unicorn. Since VCs are also more likely to take a board seat at your company – angels generally don’t take board seats and shouldn’t – that reinforces their ability to influence your startup.
For the entrepreneur, this means that a VC might push you to take risks that might not be the wisest choice for you, your employees or your customers. If you’re considering whether or not to take venture capital, you must consider whether you want that extra pressure and whether an aggressive growth trajectory is right for you.
7. They are not equally diverse
Angels are more diverse than VCs.
There is greater diversity in the global angel population than in the VC world. Whether that’s race, age, gender, geography, or experience, angels embody a wider gamut of backgrounds and perspectives.
VCs, in turn, are less diverse than Wall Street, and it’s predominantly centred around Silicon Valley.
This article was originally posted here on Entrepreneur.com.
How Platforms Are Helping Investors Find Top Social Traders
One of the main advantages of social trading platforms is the ability to outsource your investment decisions to others with more success and experience in the market.
The key feature of most social trading platforms is copy trading, or the ability to automatically copy the investment moves of others, saving time that would otherwise be spent on manual trading and reading news and research about financial markets.
However, you must be careful when selecting which investors to copy, because, ultimately, you are putting your money in their hands.
Now, features on many social trading platforms have made it easier to identity and copy top social traders. While a main feature of such platforms has always been the investment history of other users, most investors are now also assigned a risk score.
Related: Investing Trends In South Africa
Based on a scale from one to 10, this risk score lets others quickly determine the risk impact that following a specific investor would likely have on their portfolios. The risk scores are based on how leveraged an investor is, what instruments they use, and how diversified their portfolio is. Many platforms block those with the highest risk scores from being copied by others, in an effort to mitigate losses.
Most platforms also identity the most popular traders, letting users know who others are following, and making it easy to set their accounts to copy their trades. When users open an account they can also enter information about what they are looking to gain through copy trading and if they have any limitations on what types of traders they want to copy. This also helps the platform make suggestions on which users to copy.
As copy trading has gained popularity, there are also many websites that offer tips and news about the industry, including discussions about top traders on various platforms.
In addition, features like stop-loss settings and the ability to temporality pause who you are automatically copying also help to mitigate risk. While copy trading, like all forms of investment, is not a guaranteed way to make money, the ability to follow the moves of other investors helps give confidence to those new to the market, and also saves time spent on research and manual trading.
As this form of trading has grown in popularity, the tools to help identity the best investors to follow and copy have also improved.
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