Raising capital is a key part of any business and can often make the difference between failure and long-term success. However, even with a great business model and sales pitch, raising capital can often be the most difficult part of any new venture. That is why it is so critical to strategize how to raise capital and what it means for your business. This may seem like an overwhelming task, but there are a number of tools and resources out there to take advantage of if you plan ahead.
Recently, members of the Feed the Partnering for Innovation team attended the Social Capital Markets (SOCAP) conference where a number of investors, accelerators, and entrepreneurs shared tips to guarantee successful investment for growth. One of the goals of the Partnering for Innovation team was to bring back what they learned to you, members of the AgTechXChange! This Learn! article, and the next few weekly ones, will feature practices tips and advice learned at SOCAP that will hopefully help you with your enterprise.
Finding Investments: Where to Start
Knowing where to start can often be the biggest hurdle. There are countless investment models, and knowing which ones are best for your business is critical to long-term success. Some of the most important considerations you may need to think about are your current financial status and your long-term goals and timeline for growth. This will help you decide what type of investment structure will benefit your business the most given its current status. Entrepreneurs, start-ups, even already-growing businesses must conduct their own research and learn about the pros and cons of all of the options before deciding what is right. Using business and social networks is paramount in learning as much as possible about the different investment models and what they entail from firsthand experience.
If you are a young company, investment from high net-worth individuals, or angel investors, can be very strategic. It can also be the most efficient way to raise capital. These investors often make “yes” or “no” decisions within one or two meetings, injecting finance to a company quickly. This is in sharp contrast to many venture capital investors, who often require a number of meetings with the entrepreneur or business development team and have lengthy due diligence processes before funding is provided.
Grant capital can also be strategic for young businesses and businesses entering new markets or product lines, as it provides much needed funding without the expectation of financial returns. This is especially beneficial if your business is operating in an emerging market. Grant capital can assist in supporting your business as you plan for the next phase of capital. It often serves as a much needed bridge between start-up and readiness for more traditional forms of investment.
Smart Money, Not More Money
While the offer of a high dollar value investment may sound very appealing, it is critical to consider if the size and the structure of the investment is right for your business and its growth stage. Smaller investments in the form of grants or impact investment are often the most appropriate for small and young businesses. More traditional debt and equity investments are often more appropriate for well-established businesses ready to scale. Similarly, the structure of the capital you seek should also fit well with your business model. In emerging markets, especially in agriculture, patient capital is often the most favorable investment structure for businesses. Patient capital is structured so that returns are not expected right away, but rather over long periods of time. This allows for more flexibility and eliminates some of the risk of entering or expanding in emerging markets.
It can also be very helpful to identify investors for filling capacity gaps in your organization. This is especially true for young businesses that may need advice on how to scale successfully. Finding an investor with experience in a specific sector or area of business can be key to growth. It can also be helpful to find a well networked investor, as they can serve as vital advocates for you and your business and make valuable connections to other key stakeholders in the industry. A well connected investor can often provide capacity-building support through intermediaries in their network.
Another aspect of “smart money” is to stay consistent with your company’s financial and social goals. Do not change your pitch to fit what you think investors want to hear because that can lead to committing your business to pursue strategies that don’t benefit the goals of your business. It can even mean signing up for strategies and activities that distract from your bottom line. Being consistent in your messaging throughout all conversations will help to identify an investor that is a good fit for the business rather than one that changes the course of your business in directions that weaken, rather than strengthen, it.
Know the Investment Process
Before committing to any funding, make sure you know and truly understand what will be expected of you and your team. Particularly, understanding the due diligence process can help you plan the level of effort and staff capacity you will need to successfully secure investment. Many investors, especially in venture capital, have rigorous due diligence processes requiring time-intensive commitments from the entrepreneur. Know the timeline of the process and the type of information you will be required to share, and weigh the time and resources it will take to complete the process against the size and structure of the investment. You may occasionally find that what is required of you is more burdensome and resource intensive than the money is worth.
As you progress through due diligence, it is also critical to set expectations for relationship management, communication, and reporting between all parties early on. Ask up front how involved the investor expects to be in your business. As mentioned earlier, experienced and well-connected investors can be key to business growth, while a highly hands-on investor without the right experiences or networks can turn out to be oppressive and counteract growth. Setting expectations early on will ensure a successful relationship between you and your investor.
Some More Resources
Knowing where to start, being smart about the type of investment (and investor) you pursue, and knowing the actual investment process are just three of many for businesses to consider. Talk to other entrepreneurs and seek their advice for success or learn from their stories of failure. There are also many online tools and resources available that can help set you up for a successful investment experience. Here are just a few we learned about at SOCAP:
- Accelerator Selection Tool: An online listing of accelerator programs, some that include investment, are together in one easy-to-search listing! Find out why it was developed, and how it works, here.
- IRIS Standards:
- Toniic Knowledge Center: Toniic is a community of impact investors and their knowledge center posts research, blogs, and more that can further refine (and identify) what types of impact, donor funding, or grant capital is available and appropriate. For example, their “venture philanthropists and impact investors” report highlights how venture philanthropists and impact investors are working together to fund early-stage impact enterprises around the world.