Three tips for attracting capital to your business

Start-ups need to know where they’re headed and make sure they set up right to attract investors, says Cole Wilkinson, a director of accounting, auditing and investment group Pitcher Partners.

Pitcher Partners is hosting its annual Questions on Capital event on the Brisbane venture capital scene. Wilkinson spoke to StartupSmart about his top three tips for early stage start-ups seeking capital.

Get your structure right from the start

Investors prefer to work with properly structured start-ups, according to Wilkinson. 

“It’s fairly common for people who are working away on ideas to set up a partnership or a trust, but those entities aren’t really suitable to take on investments because of Australian and American law,” Wilkinson says, adding investors want special rights to protect themselves and start-ups need to enable that. “A company is structured in a way that can be divided easily and invested in.”

Getting advice on structure options early is worthwhile, says Wilkinson.

“We see people can get into trouble when they’ve offered shares to family and friends to raise their first investments,” Wilkinson says. “It might not turn away investment, but an investor now has to deal with not just one or two founders. They’re dealing with lots of shareholders and that’s a lot of work for the investor.”

Understand different types of start-ups need different patterns of investment

With more and more Australian start-ups seeking and achieving funding, it pays to research what similar groups have successfully sought, says Wilkinson.

“Know where your company is going. You may not need full-on investment – friends and family may be enough – while some start-ups will require that institutional or corporate investment,” Wilkinson says.

He says creating a business plan can help you work out if you need funding, and what type.

“Teams building apps or software might need money to build the app and a small sales team, but they can start generating profit from their first few customers, so they might be able to self-fund their way through with a slower growth path of relational selling.”

Groups that are developing networks, marketplaces or platforms are most likely to require funding.

“For those building a product or platform, know that it may not generate revenue for some time. Revenue will come once they’ve built a base of millions of customers who may never pay. These start-ups will rely on institutional money to fund their development through that expensive growth phase,” Wilkinson says.

Know what investors look for in early stage start-ups

According to Wilkinson, start-ups who can demonstrate exactly why they need the funds and the impact it will have on their growth are more likely to be successful.

“You need to know how you’re going to bring your great idea to market, who your customers are, how much it’ll cost to get there and what kind of back office you need,” Wilkinson says, adding it helps to put some numbers around that.

Start-ups also need to communicate clearly who their customers are.

“It’s not enough to have a great product. Show us who needs or wants it, and tell us why people will buy it,” Wilkinson says. “Those looking for institutional money need to validate there is real demand and take up via a soft launch or similar.”

Wilkinson adds it’s worth tailoring your presentation to each investor’s background.

“It may not bother everyone, but personally I like to see a real demonstration of how the product is working. If you’re talking to an investor with a background in your area, you may not need to do this. But I’m from finance and may not understand every piece of technology, so I want to see how it works,” Wilkinson says.

“There are a lot of investors out there who may have a strong background in say telecommunications rather than social media, but they’ll want to invest if they know how it works,” Wilkinson says.

For new start-ups with inexperienced teams, Wilkinson says you can boost your chances by recognising your skills and knowledge gaps and bringing advisors on board to show your team has all its bases covered.

This article first appeared on StartupSmart.