Mastering Capital Raising: Aussie Venture Capital Secrets Revealed for Your Startup Success!
- October 25, 2023
- 8 min read
Expect to learn
- Dynamic Fundraising Landscape: Explore the challenges of capital raising in today’s market, navigating shifts in VC expectations and risk tolerance.
- Expert Guidance: Gain actionable insights from Kieran O’Neill, a seasoned VC and former founder, specialising in B2B SaaS.
- Success Habits: Discover essential habits for success, including patience, thorough preparation, and adaptability to changing deal terms.
- Critical Metrics: Uncover key metrics vital for a successful capital raise, such as customer velocity, revenue growth, and CAC payback.
- Strategic Communication: Master the art of strategic communication, learning how to articulate market domination, expansion plans, and value creation to potential investors.
Why Raise Capital?
Raising capital can be good for a business. The money raised can be used to support your business operations, implement new projects, or expansion plans. While raising capital can be an exciting time for your company, market conditions and shifts in the expectations of venture capitalists (VCs) and the amount of risk they’re willing to take can make it a little harder to raise funds than it used to be.
Sleek sat down with Kieran O’Neill, former founder of Hometime and solution-oriented VC at Tidal Ventures. We asked him how founders can best position themselves when raising funds to make their business attractive to angel investors or venture capitalists. Kieran works with B2B SaaS startups like Orkestra, Flagship, and Loopit, helping to sharpen their operations and ready themselves for growth.
Q. What good habits should founders get into from the start to improve their chances of a successful capital raise?
Be patient: Capital is scarce for everyone, the capital raising process is taking longer, and scrutiny is being applied to all investments. It’s a good chance for you to work closely with investors, as you also need to feel comfortable working with each other over the lifetime of your business.
Be prepared: Don’t just have a pitch deck. Ensure you have as much customer and financial data as possible ready to share with investors once they are ready to move forward. It shows that you are organised and thought out.
Be flexible: The terms of deals have changed since 2021, and valuations are being driven more by fundamentals. Capital is also being deployed in more of a tiered way, i.e. Investors may invest a portion of the funds now, and additional capital is unlocked after certain milestones are achieved.
What are the key metrics for a successful capital raise?
Customer velocity
How many new customers are you bringing on every month.
YoY / MoM Revenue Growth
The change in the revenue of your company as a percentage of the previous year/month’s performance.
Customer Acquisition Cost Payback
How much your small business spends to acquire new customers and how long it takes before the business recovers that cost.
Q. What metrics are vital for a successful capital raise?
We look to invest in B2B SaaS companies at the early stages of product market fit, i.e. post-product and revenue-generating. When a company wants to raise funds, some of the key metrics we look for when assessing an investment are:
Customer velocity: how many new customers are you bringing on every month?
We’re looking for companies with a focused mid-market Ideal Customer Profile (ICP). An ICP helps startups identify the right customers to sell to, resulting in more high-quality leads and shorter sales cycles. We look for a sign-on rate of 2-3 per month, with an Annual Contract Value (ACV) of $10k.
Year on Year (YoY) / Month on Month (MoM) Revenue Growth
Being on top of your financials is critical when going through the capital and private equity raising process. Our venture capital firm looks for 100%+ YoY or approx 8%+ MoM revenue growth.
CAC Payback
Customer Acquisition Cost (CAC) payback is a key metric for us to assess. This metric measures how much your small business spends to acquire new customers and how long it takes before the business recovers that cost. Failing to determine this timeframe can impede your business activities ability to plan effectively, potentially leading to crippling cashflow bottlenecks. What looks good? CAC payback of 6 months or less or at least a pathway to getting to this point.
Q. What’s one thing that start-ups can do to increase their chances of a successful capital raise?
I could just say Product-Market fit, which is true, but I’ll go with something different.
We work closely with Tidemark Ventures, who summarise this really well.
It’s about the ability of founders to communicate their strategy around how they will do the following in their chosen market:
- Win the category by owning the control point and scaling locations
- Expand their offerings to their customers and cross-selling additional products.
- Extend through the value chain by going beyond their customers to service their customers’ customers, suppliers and employees.
- Why they have the right business to do all of the above.
In your message to investors you must demonstrate how your company will:
- Win the category by owning the control point and scaling locations
- Expand your offerings to customers and cross-sell additional products.
- Extend through the value chain by going beyond their customers to service their customers’ customers, suppliers and employees.
Q. How has the current economic climate changed investors’ targets and expectations?
Efficient growth is key in this current environment. Growth at all costs worked in 2021, but with capital being limited, this mindset needs to shift. We’re keen to see improved market research and more evidence of product market fit before investing, preferably in scaleable segments of your market, i.e. the mid-market. Existing and potential investors also have more of a focus on customer velocity vs. revenue.
Valuations have also come down and are expected to remain this way until there is more confidence in the macro environment.
Source: Cut Through Quarterly 2Q
Alt text: Capital raising and valuations graph
Q. What specifically are venture capital firms looking for from their companies over the next 12 months?
Companies that are providing real value to their customers. We refer to this as the currency of the product. There are a few key currencies that we look for. We preference those that can help to influence the revenue of a customer’s business and not just reduce costs, or create and store primary business data. We look for products that can become the operating system for their customers.
Efficient Growth. As companies have faced slower growth, they’re trying to save money and make their own business even more efficient. They’re doing this by freezing hiring, cutting jobs, using fewer tools, and managing employee performance.
These efforts have led to companies making more money for each employee and improving their overall profitability, especially in a tough economic stock market situation. However, these cost-cutting measures haven’t been enough to make up for the slowdown in growth. Key efficiency measures like the Rule of 40 and Magic Number have been going down in 2022 and 2023.
A clear pathway to go beyond winning customers. Investors want to know how founders plan to expand through their businesses via multiple products or offerings, making it much harder for customers to switch you off.
“We preference those that can help to influence the revenue of a customer’s business and not just reduce costs, or create and store primary business data.”
Raising capital—a quick guide from Sleek
What are the different types of capital raising?
There are several types of capital and equity capital raising.
Equity capital raises – where shares are issued, and new shares are sold.
Debt capital raises – where companies borrow money to repay them later with interest.
Convertible asset raises – where capital initially acts as debt and pays investors interest but can be converted into equity.
How to plan to raise capital
Capital raises require a lot of planning, and the capital raise process can take 12-18 months. Small business owners can attract investors by having solid financial management and accounting in place. Whether looking at angel investors, crowdfunding platforms, debt or equity or even an initial public offering, it’s critical to have your business plan and financial statements in order. Have all this documentation ready to share with investors or lenders.
How to raise capital for a small business
If you’re willing to exchange part ownership of your small business equity financing, there are many options—Angel investors or VCs, who provide funding in exchange for equity in the company. Crowdfunding platforms like Kickstarter are also popular choices, allowing businesses to raise funds from a large number of backers. Small businesses can also explore grants and competitions specific to their industry or region.
How to get your finances and accounting in order and raise money
One thing is certain when it comes to raising capital: your books have to be in perfect health for investors to consider giving you money. That means running a compliant and financially sound business, which isn’t always easy, especially when you’re caught up in the early days of building and launching your product or service.
Sleek is designed as a plug-in accounting team for entrepreneurs, taking care of the financial admin and supporting your business to achieve its growth goals. And, because we know keeping business expenses to a minimum is important to most founders, our packages are professional but still budget-friendly. Contact us to find out how we can help you prepare for your first capital raising.
Why is raising capital good for a business?
Raising Capital is beneficial for a business as it provides the necessary financial resources to fuel growth, expand operations, and invest in innovative initiatives. With increased funds through Capital Raising, a business can seize new opportunities, enhance its competitive position, and navigate challenges more effectively.
This influx of resources allows for strategic decision-making, such as hiring skilled personnel, upgrading technology, and diversifying product or service offerings. In essence, Raising Capital empowers a business to reach its full potential and thrive in a dynamic market environment.
Is capital raising good for a stock?
Capital Raising can positively impact a stock. When a company engages in Raising Capital, especially through methods like issuing new shares or bonds, it signals confidence in its future growth prospects. This often leads to increased investor confidence, which can drive up demand for the company’s stock.
Additionally, the infusion of funds obtained through Capital Raising enables the company to implement strategic initiatives, potentially enhancing its overall performance and, in turn, positively influencing the stock’s value. However, the success of such endeavours depends on the efficient allocation and utilisation of the raised capital.
What is a person who undertakes capital raising/ raising funds?
A person who specialises in Raising Capital is commonly referred to as a Capital Raiser or a Capital Acquisition Specialist. This individual plays a crucial role in connecting businesses with the financial resources needed for growth and development.
The responsibilities of a Capital Raiser include identifying potential investors, negotiating financing terms, and structuring deals that align with the business’s objectives. Whether through equity capital, debt financing, or other financial instruments, the Capital Raiser serves as a liaison between businesses seeking funds and investors looking for promising opportunities, facilitating the essential process of Raising Capital to fuel economic expansion.
Can a small or startup business benefit from capital raising, or is the ability to raise capital more suited for larger enterprises?
A small or startup business can indeed benefit significantly from raising capital. While the capital raising process is often associated with larger enterprises, it holds immense potential for smaller businesses seeking to fuel their growth and establish a solid foundation.
Raising capital provides these businesses with the financial resources necessary to invest in key areas such as product development, marketing, and talent acquisition.
In particular, equity financing, a form of raising capital by issuing shares of the company, can be advantageous for small businesses. It not only injects funds but also brings on board investors who share a vested interest in the company’s success. This infusion of capital enables startups to navigate initial challenges, seize market opportunities, and scale operations more rapidly than relying solely on organic growth. Therefore, raising capital is not exclusive to larger enterprises; it is a viable strategy for small and startup businesses looking to thrive in competitive markets.
How does equity capital differ from other forms of capital, and why might a business choose this option?
Equity capital stands apart from other forms of capital due to its unique structure and implications for ownership within a business. When a company decides to raise capital, it can do so through various means, including debt financing, loans, or equity financing. While debt financing involves borrowing money that needs to be repaid with interest, equity capital involves selling ownership stakes in the company.
Choosing equity capital has distinct advantages. Firstly, it allows a business to raise capital without incurring debt, providing financial flexibility. Investors, in return for their contributions, receive ownership shares or stocks in the company. This aligns their interests with the success of the business, as they stand to gain when the company prospers.
Moreover, businesses may opt for equity capital when they seek more than just financial support. Investors not only bring capital but also often contribute valuable expertise, industry connections, and strategic guidance. This collaborative approach can be particularly beneficial for startups and high-growth companies looking to leverage more than just monetary resources.
In summary, businesses might choose equity capital as a means to raise capital because it offers a unique blend of financial support, shared ownership, and strategic collaboration that can propel the company forward without the burden of debt.
What is a “Private Equity Investor”?
Private equity investors refer to individuals or institutions that invest in private companies by providing equity capital in exchange for ownership stakes. These investors actively participate in the management and decision-making processes of the companies in which they invest. The relationship between private equity investors and businesses involves a commitment of financial resources and expertise, with the goal of enhancing the company’s performance and ultimately realising a profitable return on their equity investment.
What is an Equity Raising?
Equity raising is the process by which a company secures funds by issuing ownership shares or stocks to investors in exchange for capital. This method of raising equity capital allows businesses to attract external funding without taking on debt. Equity raising is often pursued during various stages of a company’s life cycle, such as startups seeking initial capital or established businesses looking to finance expansion initiatives. The success of equity raising depends on the company’s valuation and its ability to convey a compelling investment opportunity to potential investors.
What is Debt Capital?
Debt capital is a form of financing that involves raising funds by borrowing money, typically through loans or bonds, with the commitment to repay the borrowed amount along with agreed-upon interest. Unlike equity capital, which involves selling ownership stakes, debt capital represents a contractual obligation to repay the borrowed funds within a specified period. Companies opt for debt capital when they seek external funding without diluting ownership, although it comes with the responsibility of meeting scheduled repayments. The use of debt capital allows businesses to leverage financial resources while maintaining control over ownership structure.
