For startups in need of funds, securing external investment is a popular option. But it’s not for everyone.
This is one of the many nuggets of wisdom shared during the second edition of Xero Community, which took place in Singapore on 23 July. Xero, a global small business platform offering cloud accounting software, established the quarterly event series to share industry- and business-critical knowledge with SMEs and startups, and in doing so, cultivate a community of successful digital-first businesses.
This edition shed light on the nuances of fundraising that startup founders may fail to understand. Fundraising is crucial to growing and building a business, but there are other factors to consider aside from the amount of cash raised.
For instance, it’s important to outline an investor’s role in the startup and understand how a company might fit into a venture capital firm’s mandate. Businesses need to learn about the investor’s reputation, while the latter need to see that founders are focusing on their businesses and understand their financial numbers.
Breaking the silence on fundraising
Fundraising is a quest for financial support as you grow your company. While news reports like to celebrate successful fundraises, they don’t often reflect the process behind it.
In fact, trying to understand the how and why of fundraising can be especially daunting because despite the endless discussion of money in the tech world, it sometimes feels like everyone just talks around the actual realities of how money is raised rather than directly confronting the complexities of the process.
To help fill in this knowledge gap, Xero Community invited an expert panel representing the investment and business community. Panelists were Sam Gibb, a partner at Endeavour Ventures and Junxian Lee, CEO and co-founder of logistics startup Moovaz. They were joined by moderator Graham Brown—himself also an entrepreneur—and Xero’s Asia Managing Director, Kevin Fitzgerald.
Throughout the event, the speakers covered a number of areas on how startups and mature businesses go about the fundraising process from beginning to end. The panelists discussed the etiquette of fundraising, how and what to look for in potential investors, financial literacy for founders, and what happens after you’ve raised the money you need.
Building relationships takes real work
One key takeaway from the event was that at the heart of each successful fundraising round is hours of conversation and discussion between potential investors and founders. Good communication is fundamental to strong investor-founder relationships, and strong relationships are foundational for the success of any fundraising efforts. Whether you start a conversation through an e-newsletter or a face-to-face conversation, ultimately the goal is to establish a strong relationship that puts the mission rather than the money first.
After all, the money being invested in a company is almost always going to be a huge bet by investors, so it’s important that everyone involved knows and trusts who they are getting into bed with.
These conversations should start long before the targeted month for closing the fundraise. Gibb noted that he tends to take three to six months to build a real relationship with the founders to ensure there is a mutual understanding of the company’s goals and needs, as well as the role (if any) the investor can actively play in its growth.
Moovaz’s Lee added that it’s not enough to “spray and pray” when it comes to fundraising, and that founders need to really take an interest in potential investors’ portfolios and how all their goals align.
He also suggested that businesses talk to investors about their venture capital firm’s mandate. By understanding where and how a startup fits into this mandate, VCs and founders can build a strong foundation for their relationship.
“Investors and startups should be one team working together, not adversaries sitting on opposite sides of the table,” shared Brown in a post-event write-up. “Don’t approach an investor like applying for a bank loan. They are not ATMs distributing cash. They want to be part of something.”
Knowing the financial numbers
The cost of venture capital has been well-documented to be potentially more trouble than it’s worth, especially if investors and businesses fail to align their goals, build trust, and agree on how to work together.
For that reason, Lee cautioned against taking venture capital money simply because the opportunity to do so is there. In fact, taking venture capital could be a huge mistake if the business model and the company’s term sheet don’t show the need for it.
That’s why it’s important for founders to have their business’ financial vitals at their fingertips.
In fact, Gibb suggests that not enough businesses are paying attention to their numbers. This often leads to a failure to recognise that the funds they have raised are not enough to help them reach their next milestone, which they would need to achieve in order to raise the next round.
This is only one of several blind spots that founders may have regarding their business. To shed light on these blind spots, Fitzgerald recommends having people around who can offer a different perspective and call out oversights or missed opportunities. Technology can also help business owners keep an eye on their financial position in real-time.
“By having your numbers at your fingertips and tracking your dashboard, you will start to ask the right questions and educate yourself about the finances of your business,” he said.
For Brown, it was only when he began to monitor his financials that he realised how important it was to map out his business’ burn rate—the rate at which a business is losing money. This data can tell a business when and how much to raise. It’s also important because investors can smell desperation—so businesses shouldn’t wait until they are hard up on cash to raise funds.
Having a strong understanding of your company’s financial reality can be invaluable for charting business growth, identifying gaps, and tapping on opportunities. In today’s saturated landscape, it’s not enough to simply have a great product to secure funding. What can truly tip the scales is a keen understanding of the business model and value proposition, and how that feeds into the startup’s strategy and revenue growth.
Moovaz’s Lee added that for his company, profitability is important, which is why they work closely with their accountants to plot revenue and growth, and to determine when and where they can turn a profit.
Looking for a great investor-founder fit
However, at the end of the day, Lee also stressed that founders should not rely on venture capital as the only source of fundraising. This is a mistaken assumption that many founders make, sometimes to the detriment of their businesses.
All panelists agreed it’s crucial for founders have to establish clarity on when and how to take on venture money, and that this decision has to be backed up with data. While it’s quite common—and legally necessary—for investors to conduct due diligence on their potential investee, founders don’t always take the effort to research on VCs’ reputation.
Brown added that founders should take the initiative to do some due diligence on their potential investors, with the aim of finding the right fit.
Gibb suggested that networking can be a great form of due diligence, thanks to the relatively compact nature of the investor community. Founders can get a feel of potential investors’ reputations and their suitability through simple conversations with their peers—and doing so could make a huge difference between a success and a mistake.
What if you’re not feeling like you should take venture capital? Always consider alternative ways to generate funding. The panel suggested looking to other types of loans, such as invoice factoring and government grant programmes.
To tune in to more industry trends, check out Xero on Air podcasts here as they deep-dive with industry leaders on key topics that drive business success.
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