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Finance / Finding Investors

Raising (Smart) Capital And Why It's Not Just About The Money

Raising (Smart) Capital And Why It's Not Just About The Money
Image credit: Shutterstock
Founder and Managing Partner of Precinct Partners
6 min read
Opinions expressed by Entrepreneur contributors are their own.

You're reading Entrepreneur Middle East, an international franchise of Entrepreneur Media.

Raising money doesn’t come naturally to most entrepreneurs, and it is likely that most have not done it before they actually have to do it. It is a necessary, but, at times, unpleasant part of launching and growing a new company. To make matters worse, the process is arduous, and getting to a “yes” can be painstakingly long. So, why make your job harder by concerning yourself with getting the right investors? The fact is that investors can either help a business succeed or lead it to fail. Choosing the right investors is arguably the most important decision an entrepreneur has to make during their journey. I would like to share the following systematic approach that we have used to raise capital for several companies.

1. Understand your needs and the needs of your company
Being self-aware of your strengths and weaknesses is critical in building a strong foundation for your company. This will help you find the right co-founders, employees, mentors, advisors and investors. Seek investors that complement your skills and close the skills gap in your company. Companies are living organisms with various complexities and needs. Like a growing child, companies require different things at different stages. Think of your company in terms of developmental stages and understand the important requirements of each stage. For example, at the early-stages, you may require investors with strong technical skills that will help you in product development, while in later stages, you may need financial strength to help you scale.

Important questions to ask yourself:
- What stage of development (seed, venture or growth stage) is my company?
- How much money is required to achieve the next stage of development?
- Do I need passive or active investors? > How involved do you I expect investors to be?
- Do I need industry or functional (finance, strategy, etc.) expertise?
- Do I need small or large investors given the money required?

2. Understand the investor universe in your market
There are generally five capital pools available for companies at various stages of development. As a company matures, it will likely move from one capital pool to another given the amount of money and expertise required.

Friends and family
At the earliest stages of your development, investors are backing you as an individual, rather than your business plan. Therefore, it is best to seek funds from those that know you best. Keep in mind that usually the amounts are small unless you happen to know a couple of millionaires. Friends and family tend to be passive investors with limited terms.

Angel investors
These refer to high net worth executives who are seeking private investments for outsized returns. They are a great source for early-stage capital, however, amounts usually are relatively small. There are several networks that consolidate investors to pool funds to provide a more meaningful amount. They tend to be passive investors with limited terms, but, in certain cases, you may choose to involve them as advisors or mentors.

Family groups
Wealthy families, at times, allocate capital for direct investments especially in their local markets where they are confident about the landscape, and believe they can add value. Investment amounts can vary depending on size of wealth and risk appetite. Strategies vary, but these are usually active investors that require board representation and key terms.

Venture capital
These refer to sophisticated investors designed to finance early-stage companies from seed to growth stages depending on fund strategy. They provide capital as well as expertise depending on profile of partners and track record. Investment amounts can vary depending on fund size and focus (seed versus growth stage). These are active investors that expect key terms relating to key business decisions, including strategy, management and exit.

Private equity
These are sophisticated investors designed to finance established companies from growth to mature stages depending on fund strategy. They provide capital as well as expertise depending on profile of partners and track record. Investment amounts can vary depending on fund size. Besides maybe requiring controlling or majority stake, they are active investors that expect key terms relating to key business decisions including strategy, management and exit. 

Important questions to ask yourself:
- Which pool of capital is right for me given my stage of development?
- Do I need or want passive or active investors?
- Am I prepared to attract money from sophisticated investors?
- Do I understand the key terms of term sheets to negotiate effectively with sophisticated investors?
- Do I have enough traction to get a favorable valuation from sophisticated investors?

3. Perform due diligence on potential investors
Most entrepreneurs believe the fundraising process ends when an investor agrees to invest. However, this is only the beginning of a long relationship that may last longer than some marriages. Therefore, it is critical that entrepreneurs understand precisely who their investors are, and should begin the fundraising process by identifying the right investors. Once you understand your needs, and choose the appropriate capital pool, it is time to prioritize the right investors to target. You should perform due diligence by researching, interviewing and conducting background checks on your potential investors. Some actions that you may take include:
1. Reviewing their investment track to understand their preferences.
2. Talking to existing portfolio companies to understand their approach and value-add.
3. Investigating reputation of partners through common contacts.
4. Meeting on several occasions to gauge chemistry.
5. Asking probing questions regarding your company’s strategy and future goals.

Important questions to ask yourself:
- Do I have a connection with this investor?
- Do I trust and respect this investor’s feedback?
- Does this investor have the complementary skills I need?
- Would this investor create value for my company?
- Are we aligned on the company’s vision, mission and strategy?
- Does this investor have a time horizon and risk appetite that is suitable for me?

When raising funds to grow your business, you may be tempted to accept all investors who offer you money. However, fundraising is much more than securing the necessary capital for your company. It is about choosing the right investor to help you achieve your goals and who can offer you a lot more than just money.

Related: MENA Investors' Forecasts for 2018: Amjad Ahmad, Managing Partner, Precinct Partners

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