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Venture Capital

Angels & Demons: What To Know When Negotiating Equity Funding For Your Start-up

It is important that you don’t treat equity funding lightly. A few key points are discussed in this article for you to consider.

Daniel Van Zuydam

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Getting your start-up off the ground and scaling it up usually requires an injection of capital to ensure that you can get past the lean years. Many a start-up has been left to starve in the proverbial desert seeking the promised land of an equity funding raise and many start-ups have drunk from the poisoned chalice of a poorly aligned investor relationship. It is important that you don’t treat equity funding lightly. A few key points are discussed in this article for you to consider.

Hold onto your equity, it is precious

Equity may seem like an attractive way to raise funding for your business, it is easy to “create” and it doesn’t really require that much effort to exchange it for funds, but remember that with each share you give away, you are giving a little more control and value in your company away.

At first, this may not seem significant, but the more funding rounds you go through, the more you are going to wish that you had held on to more equity, especially if your company’s growth is in line with your aspirations! Ideally, an equity raise should be one of your last options for raising funds until you have at least developed your ‘minimum viable product’. An equity raise should only be used if you are really in need of funds to keep going or to jump your production to the next level; even then, only give away as much equity as you need to.

Related: Want Funding? Finfindeasy.co.za Founder Says You Must Learn To Speak The Language

Know what stage your business is at

This is really a simple principle. If you are pre-revenue and trying to create a minimum viable product, if you have to raise funding, you should seek out “Angel” or “friendly” investors who are willing to give you very favourable terms generally at a high valuation (meaning you give away less equity and control), these are often friends or family members. If you are post-revenue, you may wish to seek out venture capital funds or institutional investors to invest in your company.

He’s just not that into you

Make sure that your investor is serious about investing into your company. For institutional investors, the way that you will know when they are serious is when you receive a letter of intent or “term sheet” from them. It’s the venture capital equivalent of asking you on a date.  They are trying to say that they’d like to see how things go, but they are not committing to anything serious just yet. If after a few months of discussion, you do not get a letter of intent, move on, there are more fish in the sea.

Related: New Fund For Small Businesses To Be Developed

Know who you are doing business with

It is better to struggle through months or even years of bootstrapping than it is to have an investor relationship with someone who is completely incompatible with your business or who is going to add no value other than money.

An investor relationship can make or break your company. Don’t simply hand over your equity to the first bitcoin millionaire with a Colgate smile who approaches you.

Look for investors who want to invest in your industry and who have good connections in that field, this can be more valuable than the money that the investor is putting into your company.

Get good legal and commercial advice

It’s important to remember that an institutional investor is just as much a business as you are. They are always going to be biased towards getting the best return on their investment no matter how altruistic they may come across. This means that the commercial and legal terms, if left to them alone, will be weighted in their favour.

You may be tempted to avoid the expensive lawyers and commercial advisors, but too many startups make the mistake of being penny wise and pound foolish here. Unfortunately, commercial investment terms can be very complex and it is always advisable to have someone on the commercial and legal front sitting squarely in your corner.

Related: The Investor Sourcing Guide

In short, equity is an effective arrow in the start-up’s quiver to use when raising funding, however, it is not the only one available. If you do decide to let it loose, don’t do so aimlessly, pick a target and aim it in that direction. The more strategic you are in negotiating your equity fundraising, the more likely you are to get favourable valuations and investment terms.

About Daniel Van Zuydam: Daniel joined Dommisse Attorneys in 2017 as an associate in the Transactional Team. His areas of focus are corporate finance, mergers and acquisitions, and corporate restructuring. Having come from a background in commercial litigation, he has learnt the ins and outs of trust and company interrelated structures and has a passion for structuring enterprises in dynamic ways to suit the needs of each client.

Venture Capital

Fitbit And Adidas Know Something That Venture Capital Doesn’t

Your startup might accelerate growth by forming a strategic partnership with established businesses — not just VCs.

Dan Lauer

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The media would have you believe that securing venture capital support and funding is the epitome of “making it” in the startup world. But, leaving aside the influx of much-needed capital, what many fail to realise is that VC partners aren’t always a good strategic fit.

Take Fitbit, a company that VCs poured millions into just a few years ago. Unfortunately, the funding couldn’t stop Apple from overtaking Fitbit in the wearable market last year.

So, when Fitbit was looking to light a spark under its fledgling line of smartwatches earlier this year, it didn’t tap another VC. Instead, it turned to Adidas, the shoe and apparel giant known for reinventing itself.

The product – the Adidas-branded Fitbit Ionic – dropped at the end of March and seems to have reinvigorated interest in Fitbit’s Ionic model, which made its tepid debut last year.

Not only did Adidas lend financial support to Fitbit, but it also lent the smaller company the fashionable, influential fan base that Adidas has carefully cultivated in the past few years.

Even though the collaboration hasn’t yet propelled Fitbit past Apple in the smartwatch space, the lesson here is clear: Your startup might accelerate growth by forming a strategic partnership with bigger, established businesses — not just VCs — to access financial backing, mentorship and expert guidance.

The sum is greater than the parts

Companies across a wide range of industries, from technology and retail to media and telecommunications, are investing in startup partnerships. In 2014, Wells Fargo created its own startup incubator to nurture new clean-tech businesses in the marketplace. The incubator, known as IN2, has invested nearly $6 million in 20 companies since its inception.

Related: Developing Partnerships With Fintech Innovators

In successful collaborations, the relationship is symbiotic, with many layers of engagement. We saw a successful example of this at the Ameren Accelerator in St. Louis. Rebate Bus, one of the startups in our 2017 cohort, used the investment and mentorship to get off the ground and scale growth.

During its accelerator phase, Rebate Bus received funding and mentorship and has since secured a partnership with a large company to run a 90-day trial. The large company, for its part, added Rebate Bus’s valuable new technology to its arsenal to stay competitive in the marketplace.

One unintended benefit was that Rebate Bus added five new jobs to the St. Louis market, as well.

In addition to providing financial support, collaborations with bigger companies provide an opportunity to tap into a deep well of knowledge and senior-level management expertise that only a more established brand can provide.

And, because the larger company will likely share a common mission with your startup, it will be concerned about more than just return on investment – something you can’t always say about a VC.

Cultivating a successful partnership

Just like any healthy relationship, this sort of collaboration won’t be successful without care and attention. Here are three ways to build and sustain successful relationships with larger companies.

1. Don’t use a partnership as a crutch. Business relationships are fragile. In fact, statistics from The Association of Strategic Alliance Professionals show that nearly half of business alliances fail. That’s why it’s extremely important to set relationships up for success from the outset.

One of the best ways to do this is to approach the partnership as only one facet of your overall strategy for your business’s growth, not its make-or-break point.

While corporations want to create an environment that spurs growth for everyone, they don’t want startups to become dependent on them. Show potential partners that you can stand on your own two feet and leverage a partnership to everyone’s benefit.

Related: The Foundations Of Growth

2. Don’t paint your partnership into a corner. So many venture-backed startups expect to see 12 years of growth in 12 months. These impossible expectations can hamstring a business partnership from day one. Instead, set time lines and goals with your potential partner that are specific and challenging, but also realistic.

Research from the American Psychological Association shows that setting these types of goals led to higher performance 90 percent of the time in the companies examined.

It’s critical to set these expectations early to ensure you and your partner are aligned from the start. The good news is that established companies whose sole purpose for a partnership isn’t ROI should be more open to realistic financial benchmarks.

3. Practice reciprocity. For startups seeking investment, landing capital can begin to feel like the endgame. But remember: Established companies are expecting something out of a partnership, too.

Older companies, meanwhile, are always looking for fresh perspectives; and startups usually have innovative ideas to contribute. It’s important to clearly communicate what each partner brings to the table.

Related: Win-Win: Strategically Partner With Your Top Competitors

Take the career-finding solution PathSource, for example. Co-founder and CEO Aaron Michel didn’t even consider partnering with a company that didn’t share PathSource’s goal to help people find better jobs. That’s why the company finally landed on a partnership with the GED Testing Service, the country’s high school equivalency testing administrator.

As Michel wrote in The Next Web: “A great relationship is a balance of give and take. When you approach a potential partner, don’t bother contacting them unless you know why they would want to speak with you. Know what you have to offer them.”

Legacy companies have a tremendous amount to contribute to entrepreneurs; often, these companies have even more to offer than a venture capital firm.

Related: 5 Things to Do Before Saying ‘I Do’ to a Business Partner

When both partners know what they want out of the relationship and know what they’re willing to give, the end result for both can be more lucrative than what each would reach on his or her own.

This article was originally posted here on Entrepreneur.com.

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Company Posts

Is Your Business Ready To Be Funded?

A venture capitalist and an entrepreneur who has secured funding weigh in on what you need to become funding-ready.

Matt Brown

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1. Ability to Scale

According to Clive Butkow, CEO of VC firm, Kalon Venture Partners, there are many important criteria VC firms evaluate when making an investment decision, but the ability to scale is the most important.

“At Kalon Venture Partners we only invest in businesses if we believe we can make a 10X return on our investment when we exit the company. If we do not believe the business can scale, both in South Africa and globally, we will not invest,” he says.

“Scalability can swing an investor valuation discussion towards a ‘blue sky’ scenario, presenting an endless opportunity for revenue multiples on an initial capital cost-base,” agrees Benji Coetzee, founder and CEO of EmptyTrips.

“However, unless the potential is paired with execution capability it remains irrelevant,” she warns. “As a founder you need the perseverance and commitment to prove that your product will be scalable. In other words, you need to demonstrate your capability to replicate the offering to unlock upside, clients and product growth.”

Related: What’s Stopping Your Business From Growing?

2. Founder’s Mindset

benji-coetzee

“The founders and CEOs of businesses are the visionaries. They are the fuel in the engine and the Lieutenant General on the front line fighting fires. A founder’s attitude, resilience and ability to rally their troops is therefore paramount,” says Benji.

“Before a company can scale it needs to go through painful growing pains. The product evolves, customer orientation flips, the team matures and competition increases. To navigate this changing multi-faceted journey, the CEO is critical in the fight. Founders create the strategy, rally the army and lead the effort, in both the tough times and the victorious ones.  Without a good fight-plan, and consistent implementation of it toward the objective, the company cannot scale.”

Clive agrees. “In my experience, what got you here will not necessarily get you there. Meaning the skills that helped you build a R10 million business are not the same required to build a R100 million business. Some founders either have the skills or are able to re-skill themselves and take the business to the next level, while others can’t. Sometimes the founder needs to be replaced with a professional CEO that can scale the business. This does not imply the founder leaves, but rather that they take on a new role that is more aligned with their strengths.”

3. Take Action

Clive doesn’t believe it’s right or wrong to scale a business – instead, it comes down to what the founder wants. “Many founders are happy to grow their businesses organically and maybe only build a lifestyle business,” he says.

“Other founders want to build a business that will change the world. We call these exponential entrepreneurs. The key to scaling a business, in my experience, is having the right skillset, as well as a mindset that embraces a ‘can do’ attitude and has a bias for action.”

“I call it AA or Attitude of Abundance,” says Benji. “Founders are the alphas. They need to lead, aspire to and believe in scale.”

Related: 3 Start-up Funding Tips To Help Launch Your Company

 

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Venture Capital

You’ve Raised Early-Stage Funding! Now What?

Four ways to set yourself up for success with your new high-maintenance stakeholders.

Candace Sjogren

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I had 225 conversations and pitched 95 separate investors in order to raise my first $2.2 million. I remember applying for every possible pitch competition, attending every startup event and chamber meeting, tracking down every high net worth individual I could find – anyone willing to listen to my 30-second, 5-minute and hour-long presentations. It was a full-time job raising money, and it took me more than a year before the final investor closed.

But then, on that fateful spring day in 2012, the seed stage fundraise was complete. Then the real work began. It is one thing to paint a vision and promise a movement. It is entirely another to meet milestones, generate revenue, and keep the company on track for an exit. The one thing that I could have never prepared myself for was the pressure that I’d feel from the investors after the money had been raised.

If you are gearing up for a fund raise or are in the midst of one, you may think that you are undergoing the toughest part of your journey.  And if you can prepare appropriately and build good habits early on, you will be.

Related: The Investor Sourcing Guide

Here are four tips for managing the investor’s expectations before you create cause for concern:

1. Communicate early, often and to everyone

When I first began interacting with investors, I made the (incorrect) assumption that they invested in me because they expected me to know what I was doing, and that they only wanted to hear from me if I had dividends to pay. This could not be further from the truth. As a (now) early-stage investor, I invest in businesses when I believe that 1) the founder has the passion and fortitude to stick with it through the tough times; 2) I have experience that can be helpful in propelling the business to first revenue, cash flow positive or exit; and 3) I will be engaged throughout the early days of the company.

To engage your investors, whether current or future, you want to be consistent and honest. If you are sending a prospective investor email and a current investor email each month, continue to send both. If you are undergoing a colossal failure or your burn rate has grown to three times what you had projected, your investors should be the first to know.

The biggest failure in building a relationship with your investors is not sharing everything that might affect them. An investor never wants to be surprised, but if you hit a wall, they would much rather hear the news from you and as quickly as possible.

2. Structure board meetings before you have a board

One way to structure communication formally and in a way that investors will appreciate is to schedule monthly board meetings before you have a formal board of directors.  Invite all current investors to join this meeting/call, send an agenda in advance, and ensure that any items discussed during the meeting are followed upon in as timely a fashion as possible. Show your investors that you know how to work with them, value their time, and heed their direction.

Related: Is Venture Capital Right For You?

3. Engage your investors for assistance

I enjoy being engaged by my companies. If I have a connection that could be useful to a sale, additional investment or a decreased expense, I expect that you will ask me for an endorsement and introduction. If I have modeled financial projections for several previous companies, ask me for help in modeling yours (if relevant). If my home would serve as a great venue for a client dinner, ask me to host.

By engaging your investors for operational assistance, you build stronger champions for your vision, and empower them to better advocate on your behalf with the outside world. If they invested in your company, they have likely found personal and/or professional success themselves, and appreciate using their credibility to propel your company forward.

4. Know when to say “no”

Perhaps the most difficult lesson I learned in my early days of investor interaction was learning to differentiate when to heed investor advice and when to respectfully disagree. Your investors come from all walks of life and have varying motivations for involving themselves with your company – not all selfless. Often, you will receive guidance that does not agree with your business model, other valued opinions, or common sense. In these moments, it is important to voice your opinion, backed by evidence, to ensure that the direction you ultimately take is a sound one for the company.

Related: 6 Money Management Tips For First-Time Entrepreneurs

Humility and coachability are important, but you raised the money because you know, inherently, something that others don’t. Be sure to use that experience of yours to guide your investors, and use their experience, where appropriate, in turn.

This article was originally posted here on Entrepreneur.com.

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