Three Strategies to Growing Capital More Effectively [A Guide for CEOs and Founders]
Capital is the Lifeblood of Your Business
You can have a superior product, engaged customers, great marketing, and stellar customer service. However, none of that will matter if you do not have access to capital - when you need it. History is littered with great companies that hit a rough patch, stumbled, and ultimately went out of business - simply because they could not access the necessary capital in the moment they needed it most.
It never ceases to amaze me. So many growth-stage companies I meet have well thought out plans around sales, marketing and tech. They are intentional in those areas, and the results show. However, when it comes to their Capital Strategy - they just sort of ‘wing it’. And believe me - those results show too.
It becomes this ineffective cycle of fear and panic whenever it comes time to raise a round. Unfortunately, fear and panic can often be sensed by investors. Don’t make that mistake yourself. Treat access to capital as a vital component of your ongoing business - because it is. Access to capital is not something you do every year or so, and turn on and off. It is an ongoing aspect of your business. We have found that following these three simple strategies can help make the capital process more effective, efficient, and less painful over time.
1. Understand the Needs of Your Target Investors
First, understand the needs of your potential investors. Most likely your round will be a mix of institutional investors (venture capital/private equity funds), strategic investors, family office, and wealthy entrepreneurs. It is vital to understand the different needs and behaviors of these investor groups, and tailor your message to each appropriately.
Family office and wealthy entrepreneurs tend to lean heavily on credibility. Essentially, they want to know if they can trust you. However, they are not known for performing much due diligence (if any in some cases). This type of investor will rely on the power of their connections and their network to confirm your credibility. They tend to invest alongside other investors that they know and trust. Messaging on your part to help this type of investor confirm your credibility and trust will pay dividends. Helping them connect with investors currently on your cap table that they can trust can be immensely powerful.
Institutional and strategic investors, on the other hand, behave very differently. They rely on domain expertise and proven success. Performing extensive due diligence is what they do, and most tend to do it well. Ensure that your company has the proper infrastructure (people, processes, and data) in place ahead of time to help institutional investors through the diligence process. If the proper infrastructure is lacking, and the due diligence process becomes difficult because of it, there is a high probability that your company will lose that capital before you even get started.
2. Forget ‘Stealth Mode’ – You Must Engage Early and Often
Second, your company cannot be in stealth mode. You must engage your investor ecosystem early and often. Potential investors need to be comfortable with your team. To gain this comfort, they need to understand your view, your target market, your expertise, and your performance (among many other aspects of your company).
Investors can gain comfort only if they have had ample time to follow your team beforehand. One pitch meeting and a few follow-up emails are not going to be enough. Build and nurture your investor ecosystem effectively ahead of time, and you can potentially save your team countless hours raising capital. Without question, not spending the appropriate effort engaging your investor ecosystem before needing capital is the single largest (and most costly) mistake that I see companies make.
3. Be the Long-term Partner Your Investors Want - the Structure of Your Organization Matters
A final thing to keep in mind is that potential investors don’t really like this process either. Sure, raising capital takes far more effort for you – the founder. However, it takes a lot of effort on the part of potential institutional investors as well. Remember, in many cases, these investors are putting their reputation on the line for you.
Finding superior companies to back is not easy to do. It takes time, it takes effort, and can require significant resources. There is an ample amount of risk involved with their decision.
Because of this, most investors don’t particularly enjoy the diligence process - no matter how vital it is. Do your company a HUGE favor. Make the investor’s job easier. Make sure that they only have to underwrite your team once. Be the ‘franchise company’ that they can continue to invest in through a series of rounds. Be the long-term partner that they want.
Investors want to partner with a sustainable team, that has well-established systems and processes, which works well together, are growing professionally, are building a great brand, are developing young talent, are incentivized, and are building a great COMPANY that will last for years and decades. THIS is what your investors want. Be that for them.
Successful Investors Have a Disciplined Process - Does Your Company Understand that Process?
Many CEO’s and Founders of Growth-Stage companies simply do not understand HOW investors are evaluating their company. Don’t get me wrong - that is not a criticism. CEO’s are driven to create a successful company. They just may not have deep experience in dealing with the investment community. THIS is exactly why we created the Bennu Capital Strategy Program. It is designed to help growth-stage companies structure their company in a manner that is compelling to investors. We cover these best practices - and many others - in the Program (You can access it below).
Follow these best practices, and hopefully, it will make life a little easier for you and your team. Who knows, get these steps right, walk the walk, and investors may come looking for you on the next round.
If you are a Founder or CEO, what is the next step?
If you are a Founder/CEO and are getting prepared for an institutional capital raise - you probably have a lot of questions, concerns, and potentially some self-doubt right now. Maybe you have a pit in your stomach at the thought of the raise process.
Here is the good news - great ideas paired to a great business are still getting funded. The challenge is to create an effective story. One that investors fully understand and can get excited about.
That is where we come in. We have created several Workshops to help your growth-stage company effectively engage with the institutional investor community.
© 2021 Marc Patterson. All Rights Reserved
