TO AT­TRACT IN­VESTORS, AL­LOW THEM ALL BE THE 'LAST ONE IN'

Business Daily (Kenya) - - LIFE: FINANCE - En­tre­pre­neur

If you’re rais­ing money for your startup, you’re likely spend­ing way more time than you thought you would work­ing and re­work­ing your val­u­a­tion. You may get of­fers from in­vestors, but not of­ten enough to fill out your round. Yet, through a sim­ple tech­nique, you can push your fundrais­ing to the next level, re­sult­ing in a higher val­u­a­tion that at­tracts the fund­ing you need.

AD­JUST­ING VAL­U­A­TION CAPS AT­TRACTS MONEY.

This is called a “step close,” and it re­quires you to raise smaller “mini rounds” in close suc­ces­sion, at ever-higher val­u­a­tion caps, rather than one large eq­uity round at a fixed val­u­a­tion. This gives founders more con­trol over the tim­ing and strat­egy of the close. All that needs to be ex­e­cuted is a sim­ple doc­u­ment at sign­ing. The first key to this tech­nique is em­ploy­ing the val­u­a­tion cap of con­vert­ible notes to your ad­van­tage. Of­ten, the value of notes are off­set by a val­u­a­tion cap, which places a max­i­mum amount on con­vert­ing your notes into eq­uity. This pro­tects in­vestors if, for in­stance, your com­pany be­comes the next Face­book or Ama­zon out of the gate.

CLOSE THE DOOR BE­HIND YOU.

The se­cond key to this tech­nique is the “last per­son in” prin­ci­ple. Very few in­vestors, even the most dar­ing, want to be the first “money in” at a com­pany. The smartest in­vestors pre­fer to wait un­til other stake­hold­ers have val­i­dated the busi­ness be­fore com­mit­ting. This is great if you have three-quar­ters of a $2 mil­lion round com­pleted, but it’s quite daunt­ing if you’ve only closed a tenth of that. Smart founders turn this prob­lem on its head, turn­ing a $2 mil­lion round into a $400,000 mini-round that’s al­ready re­ceived more than half its com­mit­ment. Mak­ing the round smaller, you give in­vestors the abil­ity to be the last money in for that mini-round — the way they pre­fer. Let’s see how these two tech­niques play out in prac­tice. Say your goal is to close $1 mil­lion in seed fund­ing. Be­cause all in­vestors want to be the last one in, close the first mini-round at $500,000 at the first val­u­a­tion cap. Usu­ally, this val­u­a­tion cap is lower and of­fers pref­er­en­tial terms to the first in­vestors. Luck­ily, you can close this small amount from close fam­ily and friends, mak­ing it much eas­ier to gain trac­tion. Once the first mini-round is com­pleted, raise an­other $500,000 at a slightly higher val­u­a­tion cap, ow­ing to in­creased in­vestor de­mand, com­pany trac­tion and progress. With more trac­tion, you’ll be able to close an­gels and seed funds. With a higher val­u­a­tion cap, you get to pre­serve more eq­uity as a founder as well. Con­tinue this process un­til you reach your $1 mil­lion goal. You can re­peat this process over a pe­riod of weeks and months, de­pend­ing on how many mini-rounds you need to reach your ul­ti­mate fundrais­ing goal. In do­ing this, you’ll grad­u­ally drive your val­u­a­tion up and have fewer di­lu­tions. Best of all, sev­eral in­vestors will get to achieve their goal of be­ing the last one in. Of course, if and when you exit, the op­po­site of­ten proves to be true. In­vestors will all want to be the “first money out.”

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