New hope for start up capital seekers
The new Prime Minister Malcolm Turnbull’s innovation drive has sparked momentum in the Australian tech venture capital scene. Australia has one of the most exciting innovation and start up scenes in the world, yet is sorely underfunded with our innovators increasingly having to source capital from overseas.
This week the AFR reported that SEEK co-founder Paul Bassat is launching a new $200 million venture capital fund backed partly by major investor James Packer. The fund will be run on an on-going basis by Square Peg Capital, a venture capital fund which has historically invested in start ups on an ad-hoc basis – one of its investments being a current PKF Melbourne client. This launch which follows on from similar initiatives announced by Brandon Capital and Blackbird Ventures will bring total funding raised or announced in the tech start-up space to $1 billion this year. It seems the Australian tech venture capital scene is finally coming of age and providing local talent with an alternative to Silicon Valley to source capital. It is with these initiatives in mind that we have prepared this article to try and assist innovators and entrepreneurs in considering the salient points of capital raising prior to pitching to potential investors.
Innovators and entrepreneurs are extremely talented when it comes to the specifics of their offering however they may lack the fundamental knowledge required to successfully pitch to potential investors. Accordingly PKF have put together a checklist to assist all business owners and entrepreneurs when preparing to pitch to potential investors:
Identify and understand the purpose of raising capital.
Pitching to potential investors to raise capital requires an understanding of how the funds will be utilised and distributed in the business. Being able to explain and convey this to potential investors will enhance the success of your pitch.
The purpose of raising capital may include: achieving revenue targets, expanding the business locations or entering new markets, growing the business products and/or service offerings and acquiring capital essential to the future growth of the business.
Calculate the amount of capital required.
Being able to quantify the amount of capital required to achieve the purpose identified increases the confidence of potential investors by providing them with a direction as to how ‘their’ money will be spent to grow the business. An investor also wants the comfort of understanding any future capital requirements and how this will be funded. Going back to the well for more funding after having raised capital a short time before gives the impression that you may be poorly equipped to adequately manage the business. Similarly investors do not want to find out that additional capital is being sought after the fact, if it means they have to invest further funds or worse yet, risk their equity being diluted by alternative investors.
Formalise an effective corporate structure.
A corporate structure which maximises asset protection and taxation strategies will be beneficial and will not jeopardise the ownership interest of both current owners and potential owners.
Understanding and communicating the corporate structure of the business will ensure the capital required and ownership interest offered is attractive to potential investors.
Identify and understand the ownership interest offered and the value proposition.
Understanding the relationship between capital required and ownership interest offered and how this affects the intrinsic value of the business is critical to the pitch.
For example, $100,000 capital x 10% ownership interest will value the equity of the company at $1 million.
Failure to understand this relationship can make or break a pitch.
Understand how the value proposition stacks up.
The value of a business should be based on some sort of defensible proposition. Whether it be a multiple of current or projected earnings or the product of a discounted cash flow model understand it and be prepared to defend it. The more support for the basis of your valuation whether it be:
- Historical actual performance;
- Projected performance supported by contracts; or
- Estimated performance supported by solid industry research and data.
- The better prepared you will be to answer the difficult questions that are posed around why you think your business is worth investing in.
Implement effective strategies.
Implementing effective strategies regarding the offering of ownership interest to potential investors is fundamental to understanding valuation and taxation effects of the business when preparing a pitch.
There are several alternatives available when offering ownership interest to potential investors. Ordinary capital, preference shares, options and convertible notes are all different options that may provide slightly different returns, inject different forms of funding to the business and accordingly may be priced differently. It is also important to understand the post investment effect on the structure and valuation of the business as this will assist in driving a successful capital raising process.
Pitching to potential investors involves strong communication of the business operations and future direction as well as how incoming capital will be utilised to grow the business.
If you need assistance preparing for a pitch to potential investors or understanding any of the concepts discussed above contact either Steven Perri or Timothy Bow of our Melbourne office or alternatively any of our corporate finance specialists around the country.