Secure those funds: Five key lessons
As a small or medium-sized business, selling your proposition, technology or growth plans to potential investors is no easy task. The reality of securing funds depends on the alignment of several factors that combine to make a convincing case for your cause – and you will have to be prepared for a lot of “no”s along the way. Here, we explore what you’ll be confronted with in your search; what investor types will be appropriate for you, and the methods you can employ to make a positive connection with them.
Whether your company is just starting out, looking to scale up, or adopting an innovative new direction, the journey to that prized cash injection from investors is fraught with hurdles that can knock back your ambitions if not handled with grace and tenacity. The most experienced entrepreneurs will tell you that you need to choose your battles wisely to get the backing that makes a difference.
And investment is not necessarily just about raising cash for a return. If you have developed a new concept or service, you may still need to inject the right talent to make it commercially viable. Similarly, in the highly competitive tech sector, for example, gaining first-mover advantage or market share may outweigh the need for profit in the early days.
Lesson 1: Understand the cash-raising options open to you, as well as the processes needed to get there.
Winnie Leung, the Managing Partner of Hong Kong-based venture capital firm Transcend Capital Partners, demystifies the protocols behind the who, what, and how of approaching investors:
“Number one is a VC or private equity investment, where the company can raise money by issuing new shares to investors,” she explains. “Number two could be debt instruments, for example, by borrowing from your bank, issuing a note selling your receivables, or even issuing convertible bonds. And number three would be a joint venture (JV) or strategic investment.”
The typical journey for equity investment, she adds, starts at Series A funding where you are ready to scale and go to market. Series funding at B, C and beyond is ideal for companies who are setting continually bigger targets and who need to source larger funds at each stage. The point at which you might be ready for an IPO will typically be an exit stage for you or your investors.
“There are different investors targeting different stages of the company lifecycle as well. So, we need to make sure that the expectations and goals of the investors and corporates are completely aligned to each of the rounds.”
Lesson 2: Research your target investor sources thoroughly to ensure you are approaching the right ones for your needs.
Investors can be highly focused or specialism-oriented in how they part with their money and expertise – so it pays to ensure your efforts are themselves focused towards those who can give you the most chance of success in your area. Hrvoje Krkalo, Co-Founder and CEO of Hong Kong-based transportation innovation specialists, GLy Capital Management, says that their firm is most interested in businesses that are in the later-stage because the innovation or technology being presented is more likely to require validation through their own centres before going out to a supply chain.
“It can take a long time to become automotive grade,” he explains. “We have a technical research centre that validates the… technologies that companies provide to us [before they can go out to market].”
Nicole Denholder, the Founder of Next Chapter ventures – a VC firm also in Hong Kong – advises: “You really need to assess and understand where you are in your business and determine how much funding you’re looking for, and what type of funding bucket that could fall into, particularly when we're talking early-stage businesses. Are you looking at crowdfunding, revenue-based financing, or moving into venture capital? Look at that spectrum before making a decision.”
Lesson 3: An investor will look for many things in your business, but profitability and sustainability are key.
The full range of support that could come your way can only count if the core business demonstrates commercial viability at the outset. Hrvoje at GLy takes the view that profitability is a must-have, but a tangible ESG policy is also expected when vehicles are involved.
“Most of our brands have a commitment to carbon neutrality, or even a move away from internal combustion engines entirely,” he says. “So the question we challenge our founders with is: how do you maintain your product margin? The pace of change is so hectic that we'd like to have a clear understanding of where the risks are to the current commercialisation claim for any company, and the potential for them to deal with those disruptions.”
Lesson 4: If your business story demonstrates diversity, seize the potential by siding with like-minded investors.
Diversity in ethnicity, gender or business culture is roundly celebrated in today’s business world, and investors are no different.
Winnie Leung saw early on that there is real potential in focusing investment on female entrepreneurs who have up to now experienced a raw deal in raising funds. “It’s very well researched and concluded that diverse teams have high performance and that diversity drives strong returns,” she says. “A recent article in Forbes says that women-led private technology companies have 35% higher indication of interest (IOI), and when they’re venture-backed, they record 12% more in revenue.
“There is, however, less than 3% venture funding globally that has gone to women-led startups in the past two to three years, and this… presented us with an opportunity to redress the balance.”
Lesson 5: Learn what switches investors on, and use it to win the deal.
Finally, in a business pitch, your authenticity is what will make the most impact when seeking funds. For Nicole, it’s important to move on from what got you here today, to really §demonstrating where you’re going as a business.
“Make sure that you move quickly away from your origin story, to be talking about your financial growth.” She advises. It’s the future that matters to investors.
In Hvroje’s view, it’s all about the ability to execute your business plan – not just present it professionally. “You can put together a great PowerPoint. But is it executable? That's what’s important to us,” he argues.
Nicole says that much is made of the need for “passion” from founders, but she would rather see what she calls “conviction”. “There are those frequently-used words such as passion and confidence that I see overused for women. Actually, what they need to do is get past the confidence and show real conviction that what you have is a great opportunity for us.”
Whatever route you take, it’s wise for your businesses to research thoroughly the funding options available to you. Only you will know the best balance to strike between trading control for expertise, or presenting a watertight case that deserves significant monetary injection.
The bar could be set high, but the rewards could also pay off in the long run.
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