<Extract from Chapter 8 of Realpolitik “Capital Providers”>
So there you are, minding your own business (sic) when one day you decide that some more dough would help. At which point, in all likelihood, you’ve addicted yourself to a drug and with the highs come the lows. One shot will not be enough and will leave you wanting ever more.
In this context, and back to the days of Timothy Leary and LSD, the “set and setting” makes a huge difference. What your mindset was and is and the circumstances in which you start this part of the journey are key to what you will experience.
A thirty-year VC emphasised to me that it is what the founder thought long before they decided to raise capital that makes all the difference. Indeed one can go back as far as what they thought on day one. Some first-time founders are muddling through, learning as they go. Some first-time founders have been scared off by what they have heard, some prior-experience founders have had a bad “marriage” and resolve to never “get married” again (at least to the same type of partner). Others, especially serial-entrepreneurs, know that they will need to raise big money along the way in order to realise their vision and start creating on day one with that in mind. You can imagine how they experience “capital raising” compared to those who just started a NewCo, scrimped and saved, borrowed here, borrowed there, got some mates to invest and then one day decided they need to do a proper “capital raising”.
Capital is often viewed as having one function:
“Capital is just the fuel for a still-in-construction vehicle.”
However it has a dual function. It acts as both fuel for your rocket ship as well as providing you with spending power to upgrade your rocket ship as it is in-flight. You end up going faster in a vehicle that can go ever-faster. But, for too many Tech companies, the time spent in the gravity-well of making losses is far longer than expected and escape velocity can be some way off. Starting an addiction is always easier than ending it and certainly ending it is always far harder than you imagine at the start.
This drug-fuelled lifestyle has two aspects.
First, there is the generally painful roller-coaster of seemingly sempiternal funding rounds, a zillion pitches, due diligence et al. On rare occasions you are so hot that you have Capital Providers lining up outside your door but most of the time these are mid-raise dreams and you wake up in the morning and fall out of bed with a bump. Stories of capital raising being easy are seemingly in the media only:
“I’m a pleasant and amiable chap in the rare periods between funding rounds.”
Secondly, the whole Board thing suddenly becomes something else. Curiously, folks who give you capital want to check what you do with it. Suddenly there are people on the Board who, rather annoyingly, often act like independent human beings with their own thoughts, hopes, fears and desires which may be rather different from yours. Furthermore, and even more annoyingly, they start acting like people who actually own a large chunk of your creation.
For any SmallCo on a growth track this is a challenging process and one where an experienced Chairman becomes an important ally, resource and asset. In Fintech, which has been on fast-forward in recent years, the whole process has been very much accelerated and, on average, an annual raise is the ritual.
For serial entrepreneurs who have proved themselves there is definitely an “it gets easier” vibe. You have more experience, you have a better network, you have more trust, you know what you are doing, you have more wins under your belt and importantly you know what VCs want and what buttons to press and which to avoid. This comment was from an experienced serial entrepreneur:
“Ideally we are looking to raise money for five years to allow sufficient time to solve challenges without the annual raise distraction/BS/constraints.”
Capital-raising is very contextual to the country, amount of investable capital floating around in it, the structure of the investing industry and general attitudes towards SmallCo investing:
“It’s better to be in the US – they throw money at you versus in the UK focus on holding you accountable.” [CEO]
We start the chapter by looking at the very different roles that founders/management and funders play around the Boardroom table (what is it with furniture anyway?1). This is followed by a quick dip into the multiplicity of types of Capital Provider and longer dips into VCs and Institutional Investors.
All these types of capital provider can inevitably come into conflict, which highlights the most important aspect of capital raising – how much or how little control over your business you give away.
Finally, we round off the chapter with some simple guidelines for the inexperienced capital raiser to bear in mind when dealing with professional investors.