This is a guest post contributed by the team from private equity marketplace Snowball Effect
Many companies that we have worked with to raise capital have gone on to hire advertising agencies, public relations firms or marketing consultancies to help them grow. When we were based at the Icehouse, our office neighbours were export strategy agency Katabolt and we happen to share a few clients in common. Like Snowball Effect, Katabolt works with Kiwi growth companies so we’ve both seen our fair share of mistakes made by companies who are raising capital to fuel their growth ambitions.
Recently we were chatting about the most common mistakes that both our companies have seen Kiwi exporters make when it comes to export growth. In future research, blog posts, and events we’ll share more of these common mistakes and how to avoid them.
Kiwi companies raising capital to fund high-growth have their own unique challenges. Later stage companies can raise capital for a range of reasons including investor liquidity, debt restructuring and acquisitions. By contrast, growth companies raise capital for one reason, to grow faster. Every aspect of a capital raising needs to tie back to the fundamental story that you are trying to tell about your company’s future growth.
When you are in growth mode there are lots of things to pay attention to so it’s easy to get distracted and not put the effort required into raising capital. The most common mistakes we see are:
Trying to raise money too soon
Many entrepreneurs read articles written from a Silicon Valley perspective and expect to be able to raise significant venture capital investment with just a pitch deck and an idea. While this does happen sometimes in the USA, the secret of Silicon Valley is that the seemingly “easy money” only flows to serial entrepreneurs who have decades long relationships already built with specific investors in advance. In New Zealand, the chances are that for any given capital raising, this is the first time starting a business and the investors aren’t previously known to the founders. In the New Zealand market, growth companies need to demonstrate early traction before investors will put down serious money. The best ways to demonstrate traction include solid market research, working prototypes and most importantly, revenue from early sales.
Raising money too late
Investors don’t like to see a company that has stalled in growth or is about to run out of cash. While it’s certainly possible to raise capital when your back is against the wall, it’s much easier and safer to raise funding before you need it. A good rule of thumb is to raise capital based on the cost to achieve your next major milestones in growth, production or sales, instead of just buying yourself time to keep operating in a steady state.
Getting the valuation wrong
If your valuation is too low, then you’ll give away too much of the company in one round and not have enough for future investment. Make the valuation too high and the investors won’t be receiving enough of a share in the company to make it worth their while to invest. For publicly traded companies and later stage mergers & acquisitions there are lots of reliable company valuation techniques such as discounted cashflow, but these techniques don’t always work well for valuing a rapidly growing company. For growth companies, the valuation is best determined by benchmarking to similar companies and testing the valuation with multiple potential investors. This means maintaining some flexibility in valuation early on in the capital raising process and listening carefully to feedback.
Being vague about use of funds
Investors want to know what you are planning on spending their money on. Many companies treat the use of funds part of their capital raising process as an afterthought or a shopping list of unnecessary luxuries. Every item in your use of funds needs to tie back to the impact it will have on the growth of your company. Whatever the internal “return on investment” calculation you would make on any sales, marketing, or growth expenditure needs to add up for investors as well. A good signal for investors is when you know the lifetime value of a new customer, the cost to acquire a new customer, and how the cost to acquire a customer varies by marketing channel and geography.
Not knowing your numbers
One of the leading causes behind the common capital raising mistakes is not tracking the numbers carefully inside a business. You need to keep a very careful eye on the business fundamentals like gross margin, overheads and cashflow. It’s also important to know the key metrics and drivers that investors will ask about. Investors like to see that you know the fundamental economics of how your business model works inside and out. You need to know the past, present and future of your company through the lens of the key operating metrics and financial figures.
We’ll cover more of these growth mistakes in future articles and events. Avoiding the common pitfalls of capital raising is important because it can help set your company up to grow more effectively. Even if you’re not currently raising capital, it worth having your ship in order so you are well prepared in advance.