Raising capital in three easy steps
In recent months, various companies attempting to raise capital approached HafeziCapital to review their product for market viability and advise on ways to enhance the company’s ability to raise capital. The ultimate goal was to increase the probability and valuation of the company for raising capital. We conducted a top-down review of all aspects of their business, from financial modeling, risk mitigation, organizational structure, marketing, product viability, and strategy due diligence. The recommendations led to structural changes within the organization that enhanced both their probability and valuation in raising capital. HafeziCapital wanted to share three key components in raising capital.
- “Street-test” the product in a cheaper environment and see if the idea has any traction or merit within the market. One of the worst things any new start-up can do is to waste money on unproven products and business models. Build a bare bones model, and test it within the market. I have had countless inventors come to me and say, “I have invested my life’s savings in this company.” The same way that you would not gamble your life savings on the roulette table, you should not enter a new market unprepared. The notion that “If you build it they will come” is generally not true within the start-up world. The most successful software development companies focus time and effort not only on the User Interface (UI), but also on the business model.
- Understanding the Capital Requirements is imperative to raising capital. Know how much you need and how long the investment will carry the organization. Capital requirements must also take into account corporate scalability. How hard is it to scale your product to the region, national and international markets? What are all the costs associated with that and how soon will you reach a positive ROI on the investment? Some businesses are very easy to scale, while others are much more challenging.
- The human capital is as important as the financial capital. As an organization, you have to understand what your weaknesses are, and hire people who are strong in the areas that you are weak in. Organizations that bring talent to strengthen their weaknesses have a strong chance in raising capital. Having a strong management team that consistently brings the best out of its employee’s coupled with a strong product is a key component to raising capital.
Real Case Study for “Street Testing”
The owner of Zappos, Tony Hsieh, street-tested his website by developing an elementary site and seeing if people would order shoes online. He would go to shoe stores, take pictures of the shoes and post them on Zappos site. As he gained traction in the market space he invested in a prove model. His model was capital intensive and required sourcing, housing, order management, customer service, distribution, return deployment, accounting and delivery. His testing allowed him to challenge the unknown and tweak his business model to ensure market viability. This allowed Zappos to be more fluid in the market space.
Real Case Study for “Capital Requirements”
In a recent strategy discussion on capital requirements with a regional fast food chain, we challenged the client’s assumptions on scalability and capital requirements for growth. As we discussed supply chain models, market entry models, human capital, distribution, sourcing, marketing, and market development expenses, our assumptions had the company requiring 267.4% more capital to sustain operations. Remember Inventors fall in love with the technology, Investor fall in love with the business.
Real Case Study for “Human Capital”
In a recent engagement, our due diligence team found that a key developer within an organization that was raising capital was leaving the organization. This developer was the only person within the firm to understand the technology inside and out. Our team had to move quickly, because the human capital can be as valuable to investors as the financial capital. Had the developer left, the deal would have fallen through costing the company its survivability.
Every Capital Packaging is different given the various strengths and weaknesses of each organization. Furthermore, the economic and market cycles within the industry affect capital raising. As a company you have to know your limitations, and mitigate any activity that weakens the organization. As with medicine, you should not self-diagnose and self-treat. If medicine were that easy it would not take years of schooling and practice. Your actions may undermine or negatively impact the success of your organization. Focus on what you know, and deliver it consistently and allow professionals to guide you through the process. Keep these three key components to raising capital in mind and they will increase your chances in raising capital.