John Courtney offers advice to ambitious business owners keen to grow their company by raising capital.
If you’re looking to scale-up your business, then you’ll need to secure the necessary funding to do so. And if you’ve never done this before, then it may seem like a daunting task. However, I’m here to tell you that you shouldn’t be daunted, but you do need to be prepared to work hard. It’s a simple case of knowing what you want, and then planning to achieve it.
But before you start trying to raise the money, you do need to have a basic knowledge of what the process of raising funds looks like. In this article I’ll advise you how to prepare for this task, which should help you in your quest to attract potential investors and I’ll provide some tips on how best to approach these companies and individuals.
Equity: How much is too much to give away?
This all depends on what stage your business is currently at. Between 10-20% is a typical amount of equity to give away if you’re looking to raise funds for the first time. It may be tempting to give away more than 20%, as this will secure more funding during the early stages of scaling-up. But don’t always believe that just because you have acquired more money, it’s the best possible tactic. Not necessarily.
Don’t forget that the value of the percentage share you have sold will increase as your business grows. This means you would have actually gained more money had you kept some of that equity for yourself. It’s vital to find the right balance of what you need to grow but, at the same time, not give too much away, as this will limit your profits in the future.
Alternatively, you don’t want to go too small either. If you give away less than 10% of your equity, then the likely scenario is that the investor will not feel too much of an attachment towards your business and would not want to be too heavily involved. You want your investors to feel connected to your business and if you go too small, you may struggle to raise the necessary funds.
Should you be thinking ahead about future rounds of investment?
Well, it’s always good to keep one eye on the future ‘ especially in terms of funding and equity. But, by giving away too much equity in your first round of funding, means your share will become smaller and smaller, should you try to raise more money going forward.
As your business grows, the monetary value of your shares will increase. Therefore, during future rounds of raising capital, you should be able to sell smaller amounts of equity and still receive a sizeable quantity of funding. It simply comes down to what you want for the future of your business. You need to make a calculated decision on how much you’re willing to give away and what your desired profits are in the future. This should help you to reach a decision.
How will future rounds of funding affect those who invested during the first round?
With each round of funding you must introduce new shares. This will lower the percentage of equity for those who have already invested in your business. That said, providing your business grows, the monetary value of their equity will become higher anyway.
The key to all of this, as with all aspects of your business, is to do your research. You need to know exactly what decisions you are making and, more importantly, why you’re making them. You need to do research to make certain you understand how equity works, and what impact your decisions will have further down the line ‘ with regards to equity and investment.
If you’re in any doubt about understanding equity and funding, then it’s important to bring in outside help. This will allow you to make informed decisions for the benefit of your business. Outside help can come in the form of a full-time or part-time finance director, or even a non-executive director or chairperson. This decision is entirely up to you. But you do need to know why you’re hiring an outside expert and what exactly you want them to do.
Making decisions about equity, and the raising of funds, will help you to understand what type of investor you may need to approach and attract. Don’t forget, these are the people you will be working with in the future. My final bit of advice goes like this: A good general rule of thumb is to view every share you have sold as being gone forever. It’s not impossible to buy back shares but always believe that once shares or equity have been sold, it’s probably not coming back.
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