Capital Raising and Exit

CAPITAL RAISING

While there are a very small number of fortunate companies that grow with little or no “outside” help, the large majority of successful Start-Ups engage in numerous bouts of capital-raising through rounds of external funding. These funding rounds provide outside investors the opportunity to invest cash in a growing company in exchange for equity, that is, partial ownership of the company.

SEED FUNDING

Seed funding is the first official equity funding stage. It typically represents the first official money that a business venture or enterprise raises – this early financial support is the “seed” which will help to grow the business. There are many potential investors in a seed funding situation: founders, friends, family, incubators, venture capital companies and more. One of the most common types of investors participating in seed funding is a so-called “Angel Investor.”

While seed funding rounds vary significantly in terms of the amount of capital they generate for a new company, it’s not uncommon for these rounds to produce anywhere from $10,000 up to $2 million for the Start-Up in question. For some Start-Ups, a seed funding round is all that the founders feel is necessary in order to successfully get their company off the ground; these companies may never engage in a Series A round of funding. Most companies raising seed funding are valued at somewhere between £2 million and £4 million.

SERIES A FUNDING

Once a business has developed a track record (an established user base, consistent revenue figures, or some other key performance indicator), that company may opt for Series A funding in order to further optimize its user base and product offerings. Opportunities may be taken to scale the product across different markets. In this round, it’s important to have a plan for developing a business model that will generate long-term profit. Often times, Seed Start-Ups have great ideas that generate a substantial amount of enthusiastic users, but the company doesn’t know how it will monetize the business. Typically, Series A rounds raise approximately £1.5 million to £10 million, but this number has increased on average in recent years.

In Series A funding, investors are not just looking for great ideas. Rather, they are looking for companies with great ideas as well as a strong strategy for turning that idea into a successful, money-making business. The investors involved in the Series A round come from more traditional venture capital firms.

SERIES B FUNDING

Series B rounds are all about taking businesses to the next level, past the development stage. Investors help Start-Ups get there by expanding market reach. Companies that have gone through Seed and Series A funding rounds have already developed substantial user bases and have proven to investors that they are prepared for success on a larger scale. The average estimated capital raised in a Series B round is £20 million. Companies undergoing a Series B funding round are well-established, and their valuations tend to reflect that.

Series B appears similar to Series A in terms of the processes and key players. Series B is often led by many of the same characters as the earlier round, including a key anchor investor that helps to draw in other investors. The difference with Series B is the addition of a new wave of other venture capital firms that specialize in later-stage investing.

EXIT

It may seem a little incongruent to discuss exit within the same breath as Capital Raising, but for many entrepreneurs who create Start-Ups, and certainly those involved in Series A and B funding, it will be a pressing question.

For many start-ups, the most obvious exit is via an acquisition. This is when another company buys all or most of the own business and takes over control of it, but there are other types of exits too, including:

Refinancing: selling to a different investor, such as a venture capital company;

Merger: uniting two companies into a new one to gain market share, expand reach or gain economies of scale; and,

Initial Public Offering (IPO): selling shares to the public.

The ideal timing for these events will depend on the success of the venture, the need for more finance, investor requirements and market conditions.

It’s never too early to start planning your exit strategy. Your strategy will direct many of the business decisions you make, including:

how you run your company;

which partnerships you pursue;

how you establish your financial reporting system; and,

what funding choices you make.

While exiting most often refers to money, for the Early-Input Management you will need to decide on an exit route for yourselves as well. For example, you may want to exit the business:

to realise the capital you have built up in it;

to start a new venture with a new idea; or,

because you may not be the right person to take the larger-scale, established business forward.

Having seen in all before, either in the Cannabis-Space or when one of the Co-Founders was “in the City”, at The Canna Consultants our advice is that its never too early to start thinking about Capital Raising and Exit – the two often go hand-in-hand because success breeds the need for both.