This series started with The history of Gilligan Sheppard Capital Raising. GS has been active in the property syndication and start-up capital raising space for quite some time. There are many that know us well. However, there are also many more that do not realise that GS ‘do’ this.
LIFTOFF ARTICLE SERIES: CAPTIAL RAISING
The reason many may be unaware that we do this, is that we have worked ad hoc within our client base and extended networks for our capital raising activity.
We have not advertised or proactively publicised our activity in this area. Perhaps because of this, our approach has evolved over time and specific experience to develop our general philosophy to early-stage capital raising. Let us explore this further:
Founders and Control
There are many founders who are fixated on controlling everything, at every stage of the business. Though not a deal breaker, this is a red flag on their perception of their investors, and the use of smart money and networks in the journey of a business. We emphasise that the right investors are really more like partners, especially early investors who bring more than just money.
Investors are guilty of this too, which can be even worse. The capital providers should not be attached to control and recognise that the founders are as important.
It is all about treating everyone fairly.
People and Skills
Who are the people currently involved and what are their contributions? How committed are the founders to the current venture, is it 100% of their time, or 50%? are they ‘all-in’? What are their priorities?
- What salaries are they taking from the business, and does it reflect ‘skin in the game’? Do they understand the stage of the business they are at?
- What skills are around the table, and what is missing? How important are the missing pieces, and how is this being addressed?
- What is the level of trust among the founders and investors (if any)?
- What is the composition and quality of the directors and/or advisory board?
- No matter the product or service of the business, the people are always a large part of the investment.
It is easy for start-ups to end up with the wrong people around the table, and often nobody wants to have the hard conversations about who needs to stay and who needs to go. But if you do not have these conversations, you’ll kill the business.
Any ambitious start-up in New Zealand eventually needs a scaling plan which involves international expansion.
Access to this is often a carrot-stick offered by international VCs’ or Private Equity. Often this can carry terms in preference to existing investors. This can seem attractive – there are lots of statistics and success stories with international VC’s. If all goes well, it’s great.
But what if everything does not go well? There is no guarantee that international VCs’ will double down in further rounds, where the terms may be punishing and make future rounds complicated. It may also be difficult to go back and ask your original investors for support.
It is important to recognise that the interest in you and your business carries value; value that has already been created and exists to build on.
It is important to be objective and consider that the businesses that have thrived with overseas VC money, may have thrived despite the restrictive term sheets, not because of them. Or they might have thrived anyway, albeit slower.
This is not to say, not to transact with a top tier VC – a good international investor/partner in many cases will fast track your growth. Just ensure the terms of the round protects your values and recognises the journey to date. Do not be afraid to negotiate, and perhaps to say no, even though this may mean taking a slower road.
While a lot of investors are interested in your exit, we are not. At this stage all the focus should be in building a long-term, profitable, sustainable business.
This is not to say we do not want you to have a grand IPO one day, especially if you are founding a business with others. But you may be in it for the long-game, and your personal objectives should be understood and planned for.
Be realistic about your valuation. What is the risk profile of where you are really at now? Not where you think you will be in a week or a month.
As we have discussed before here (What to expect when first looking to raise capital), it is important to have, understand and be able to support your projections and your assumptions.
Don’t underestimate the capital you need for the next phase. It is likely to cost you more and take longer than you think.
So, to summarise – our start-up equity funding philosophy is really driven by our collective personal values and our history. This fits in with other early-stage frameworks, but it is also a bit different.
We don’t just unapologetically ask the hard questions. We practice what we preach and actively invest in early-stage start-ups and help connect other investors to start-ups when there’s a benefit in doing so.
If you’re unsure what track you are going down or want to know more about our philosophy for early-stage investing, get in touch.