Attracting ‘smart’ capital for your tech start-up

Despite being relatively young, Sri Lanka’s tech start up eco system has witnessed tremendous growth over the past few years. Home to world-class human capital, an envious geographical location, an increasingly favourable business climate, and relatively superior infrastructure to other countries in the region, Sri Lanka is well poised to become a thriving start-up hub. Tech in Asia’s recent article on ‘5 things you didn’t know about Sri Lanka’s start-up scene’ sheds light on its underreported potential, and we at Stax could not agree more.

However, it is a reality that capital is a key issue hindering the growth of many local tech start-ups. While availability and access to capital are commonly spoken of, the critical juncture we are at makes it more pertinent to consider start-ups’ ability to attract capital—smart capital.

Attracting external funding is both an art and a science for companies at any stage of their lifecycle. In the case of startups, it’s not incorrect to say that it is more an art than a science. While many entrepreneurs place paramount importance on the science—valuing their business, this is just one piece of the puzzle. Merely having an impressive valuation won’t make investors take their checkbooks out.

It is imperative to start thinking like an investor when embarking on the journey of raising capital. The biggest concern on most investors’ minds is risk— “Is the risk I’m taking worth it?”, “how will the startup manage its risk?”, and “what premium will I get for the risk I’m taking?” This essentially means that an investor wants to know the startup’s growth potential and whether his investment is worth the return he will get when he exits a few years down the line. Building confidence in the mind of your investors often begins with the equity percentage you are willing to offer. This is a delicate balance. Offer too much and you may indicate lack of belief in your business, offer too little and it won’t spark interest among investors. Thereafter, it essentially boils down to two things—how good your product is and how good your people are. A solid product with an attractive market opportunity, coupled with an experienced and passionate management team is a winning formula.

Many tech start-ups inherently possess characteristics that can create risk premiums for investors, but in most cases these are not articulated in pitches. At Stax, we use our 5C methodology in value creation to identify subtle nuances of your business model to ensure maximum value potential is achieved.

So you’ve got a potential investor who’s willing to provide you with the capital you require. But is this it? Is any money good money?

In our experience, companies that witness exponential growth are generally ones that have attracted smart capital. Instead of viewing fund raising as an opportunity to receive cash, they have viewed it as an opportunity to expand their resources. These companies have selected investors who give them access not only to money, but also to experience, access to networks and/ or geographies, mentoring, and guidance. Having the backing of strategic investors also give sophisticated investors the confidence in investing in your business should you go for subsequent rounds of funding. Many investors conduct diligence prior to making investment decisions. But it is also important for start-ups to conduct diligence on potential investors to ensure that they are the right strategic fit for the business.