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A little bit about me

Hi. While this blog is a part of Seed Catalyst’s website, I realised over the initial few weeks that a lot of you are first introduced to the firm via the blog rather than our home page.

So to introduce myself - I’m a business consultant working with early stage technology firms to help streamline their strategy and go-to-market approach and support them for fund raising. 

With this blog, I aim to capture key market trends that I see in the industry, the ecosystem and cross-plays in some of the more interesting and upcoming sectors, as well as cover interesting companies that I meet. 

I will also be addressing vexing and interesting valuation and deal/term-sheet structures that would be of interest to technology start-ups at various stages of their growth.

So let’s get started...

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Selecting growth over dilution PDF Print E-mail
Blog - Startups
Thursday, 11 March 2010 14:47

 

There was a very interesting post from Mark Suster earlier today on what is the right amount of capital for a start-up to raise? While “too much money too quickly can be destructive” at the other end trying to raise a small amount now and a larger round later can have its own share of problems:

“- the funding environment might change dramatically – there may never be a next round (see: March 2000, September 11, 2001 and September 2008)
- you may hit unexpected bumps in the road yourself making the next round tough
- there may be major competitive changes in the market that makes your next funding round hard (e.g. Google suddenly makes your product category free)
- you might do a great job in a great market but a competitor raises $3 million when you raised $500,000 and suddenly you have to compete with them”

And that brings us back to the same question – what, and in fact, when is the right amount to raise capital?

Scenario 1: Pre-seed.

Bootstrapping through family and friends cannot be recommended highly enough in the initial stages. Assuming that (a) the idea is on paper (b) the domain name is registered and (c) the website development work has been initiated, will lead to financing is being over-optimistic (I’m being polite). The concept needs to have developed traction or the product/solution reached at least a proof of concept stage for there to be some relevant interest from investors.

 

For innovative technologies which may have upfront capital expenses, there are various grant programs as well as government funding schemes which can be tapped. Getting the first customer or partner to share part of the installation expenses would also be helpful at this stage. Sure, it will make a dent on the revenues but having the service up and running is a line in the sand as far as demonstrating viability is concerned.

 

Several firms I know have a technology which is certainly relevant in their market place but instead of trying to generate interest from a customer base they tend to focus on generating an investor base. Invariably it leads to a loss of time which could have been better spent elsewhere. At this stage, the question of how much to raise is hardly material - enough to get the business off its feet but not necessarily enough for a 60 second TV ad during the world cup finals.

Scenario 2: Validated Product Offering

And then we have firms, which have started generating revenues, developed a customer base, and if in an online model have generated a relevant online presence. They now start debating whether they want to raise a significant round and dilute ownership. It certainly applies to a firm I met recently.

They are operational in UK and plan on launching in 4 new markets by year end. But their launch plans are being dictated by their available funds. My strongest recommendation would be to spend a weekend on the drawing board, develop the ideal scenario – what are the markets they want to launch in, how will that help revenues develop in the next 2-5 years, what are the expenses they need to incur for a smooth ramp-up and subsequently – what is the financing needed that can help them achieve this growth - which is the capital that needs to be raised.

And finally, in summary, raising capital takes time. Finance the firm for 18 months – 2 years so that the firm is not out of one financing and then preparing for the next. 

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