234Finance: How to Raise External Capital For Your Startup

Raising startup capital can be a gut-wrenching process for any entrepreneur. On one hand, it is validation that you are on to something and that capital injection will help you scale significantly. On the other hand, there is the fear of diluting ownership of your startup, and in extreme cases, losing total control of the business you worked so hard to build.

If you are active in Nigerian startup circles, you may have read about the ongoing disputes between startup founders and their investors who are allegedly taking over their business. As terrifying as this sounds, this is the reality that startups are grappling with. What is the right way to scale? Boot-strapping and growing organically as a startup is great but the right investment can significantly scale your business by 10x or more. Think about the tech unicorns or even some of the traditional companies that are successful today. Many of them didn’t get to the level they are in without significant capital injection from investors. In building a successful venture, there is no hard or fast rule. Every business is unique, and what works for A may not be applicable to B.

After engaging hundreds of startups who claim to be “seeking funding,” we realized that many are not mentally prepared for what it entails to raise capital from investors. Investors, by default, are looking out for opportunities to grow their money and will take an unsentimental approach towards doing just that. This includes eliminating any threats to their investment, including the startup founder.

Now that we have cleared this up, do you still want to raise external capital? Here are some factors to consider:

Define What You Need
It is necessary to identify what stage your business is in and the funding type to pursue. If you are in the incubation stage, you should target family and friends, grants, angel investors, startup accelerators, and so on, to raise capital. However, if your business has large scale operations and needs significant capital injection, then Private Equity or Venture Capital funding is more ideal for you. If your business has enough cash flow to stay afloat, consider bootstrapping till there is a need to take a loan from a financial institution. Between debt, equity, or a blend of both, a scalable venture must raise funding at some point in its life cycle.

Do Your Homework
It is important to conduct thorough due diligence on any prospective funder. Gather as much historical information as you can about their investment portfolios and exits. Are they well versed in the industry or the market you are in? Do they understand some of the peculiarities that come with your business? You must understand that people only back what they believe in, understand, and will yield returns on investment. There is no emotion attached to business when it comes to capital raising. Ensure that your needs match what your investor is looking for. The investment criteria must match your offer, investment timelines must be in sync with the timelines you have set, and if the investor is active in your industry, this is a plus. Like a marriage, both parties must align.

Be Conservative with Projections
Many entrepreneurs fall into the trap of exaggerating their business forecasts in a bid to attract funding. This may attract the funding, but consequently result in immense pressure on the founder to deliver on the projections. If expectations are unmet, it eventually results in a dispute between the founder and the investor, which rarely ends well. A better strategy will be to under-promise but over-deliver on business forecasts. For many entrepreneurs, there is no way to predict what the business environment will be like, particularly in Africa’s emerging markets. Nonetheless, make provision for business mishaps in your pitch and communicate this to prospective investors before the deal goes through. This way, both parties are prepared for such mishaps if and when they do occur.

Protect Your Interests
Are your interests adequately protected? Do not go into any deal blindsided. Seek legal counsel and don’t undervalue your sweat equity. As important as it is to raise capital, the time and effort put into building a profitable venture can never be undermined. Before any negotiations, have a ratio of the most amount of equity you are willing to part with and be prepared to defend it to any prospective investor. If you encounter investors who show more interest in equity than the value addition they are bringing to your business, it is a red flag to discontinue further negotiations. It will be helpful to reach out to other entrepreneurs who have successfully raised capital and have them share their experiences with you.

Be Willing to Share Power
If you are sentimental about the leadership and strategic direction of your venture, raising foreign investment may not be ideal for you. The moment you raise funding and dilute the shareholding structure, your business isn’t yours alone anymore. You must be brutally honest to yourself about the long-term direction you want for your company and this will guide your decision to bring in investors or not. For some founders, success comes from seeing a business they founded thrive. Others may want to retain an active role in the day-to-day running of their venture. When bringing in investors, the management structure will keep changing as the business scales up. Do you want to own 100% of a million-dollar company or 10% of a multi-million-dollar company? The ability to answer this question genuinely will help you decide if raising external funding is for you.

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