When GO1 raised our first seed round I went into negotiations knowing next to nothing about raising funds. But on the other side of the table, the investors that I spoke to did this every day.
And that makes it dangerous. One of our first investors turned out to be a shark.
Fortunately for us that shark (Steve Baxter) is a good kind of shark. We got lucky. It’s the bad kind that founders need to be aware of. Knowing how to negotiate a capital raise, understanding what terms mean and what terms are important, is critical.
I am by no means an expert, but here are my thoughts on how to approach raising investment.
My first piece of advice is fairly obvious, but easy to get wrong. If you are looking to raise money you need to first really understand your own business inside and out. When I first spoke to Steve I wasn’t looking for money, I wanted to bounce ideas around and learn from his experience.
I quickly learned that my understanding of business was incomplete. Sure, I understood our product back to front. I understood the problem we solved and why customers bought it. But I didn’t really understand our long term competitive advantage. I didn’t know whether our key metrics were good or bad compared to other companies of similar size in our space.
You need to understand your own business and the industry that you operate in completely before you can convince someone else to invest.
Now I know how our metrics compare to similar stage companies by having stronger connections with CEOs and founders of peer companies. I also understand how “having a better interface” or “having more features” is not a sustainable competitive advantage. Instead, I now know how to apply the lessons from first year studies in economics on network effects, economies of scale, and other barriers to entry, to understand what makes our model defensible.
Second, you need to find potential investors who share your vision and won’t run when things get tough. Running a business is hard. Finding people who share your vision is important. They’re more likely to be passionate about what you’re doing, understand the space and be able to offer insight – or at least provide some healthy critiques – and they’re also more likely to to be invested for the long term.
We have been incredibly lucky with the investors that have chosen to support us. They are our biggest advocates, and provide a great sounding board for critiquing plans.
Third, you need to understand the mechanics of the deal. The introduction to this article might make it sound like deal terms are the most important aspect – they aren’t. But they are still critical.
Do some research and understand valuations: you don’t want to raise money at either too low (dilutive) or too high (hard to raise next round) valuations. There are some helpful guides on mapping out dilution over time and also the reasons why you don’t want to raise at too-high a valuation. You should also understand the differences between pre and post money, between fully diluted vs not, and participating or non-participating liquidation preferences.
While this may sound like legal mumbo jumbo, these terms are incredibly important and are just the beginning. Fortunately there are some great blog posts (e.g. this post by Geoff Ralston of Y Combinator) that will help provide a good intro to raising funds.
My best piece of advice: if you can, find someone who has been there and done it before.
And the exciting thing is, that’s not impossible anymore. The Australian startup ecosystem is maturing. Whether you’re in Sydney or Perth, there are people who have been there and done that.
If you’re able to connect with someone who is a few years ahead of where you are they can often provide some great advice on what to do and what not to do.
Typically other founders are friendly; they don’t bite.
About the author
Andrew Barnes is the co-founder and CEO of online onboarding, compliance and professional development platform GO1.com. He is a Rhodes Scholar, studied education technology at Oxford University, and holds a PhD in Business Management at the University of Queensland. Barnes and his co-founder secured $4 million in funding from Shark Tank’s Steve Baxter, Tank Stream Ventures and Blue Sky Ventures enabling them to continue expanding their offices across the world.
See also: “There’s no magic bullet, we’ve just had to dive in,” says the CEO of global edutech startup GO1, Diversity can be a double-edged sword when businesses don’t have systems to harness it, Entrepreneurial success is impossible without creativity: ‘zig when others zag’ and more tips and Yes, leadership isn’t rocket science… but who said rocket scientists make effective leaders?