The digital revolution has shifted the investor ecosystem and paved a path for easier start-up market entry. These days, even the simplest of ideas can stimulate conversion to a business and the entry barriers have reduced for many. Added to this is a shift in mindset of entrepreneurs where they habitually rely on investors to fund their idea.
Research however by Harvard Business School senior lecturer Shikhar Gosh indicates that as many as 75 per cent of venture-backed companies fail. This research was based on 2000 companies that raised in excess of $1 million, marking trends that may follow through to our shores and the ready reliance on funding that may begin to be challenging for starting entrepreneurs.
The number of investment deals is beginning to trend downward and the move to bigger raises on more mature businesses will see a closing in the investment pool. We are witnessing a drop from 31 deals to 27 in the second quarter of 2018 with KPMG also flagging a concern that early stage ventures are seeing dwindling capital opportunities.
A mind shift is required to establish and future-proof entrepreneurial businesses.
Firstly, develop a robust forecast for your venture – set out the key milestones over the first 18 months and align the capital funding requirements to achieve these, set a budget and stick to it! Starting with a disciplined mindset at the outset, reviewing and reforecasting against plan, will help set to start reducing the “dilution” of founders equity as the business grows.
Build out a five-year “investment roadmap” and identify at what stages of growth capital investments are requirements following your seed funding stage. This roadmap would typically encompass the four main phases of funding to drive your business growth:
- Founder / seed funding: getting the venture started
- Series A – driving the go to market: building traction
- Series B – funding: building revenues/customer base
- Series C – leverage and scale the business: acquisitions or new market entries.
Next, it is important to foresee and model your likely exit strategies. For example, if you envisage a merger & acquisition, begin to have your sights on a target organisation and a strategy on how you can begin to align. Alternatively, if it’s an IPO – focus on market differentiation and then take steps back to where you are today to enable your organisation to achieve that.
The most important aspect to keep in mind is to avoid the dilution of wealth. Facebook’s CEO, Mark Zuckerberg has been the most successful in this and sits in as the seventh wealthiest people in the world, at IPO of Facebook he held 28 per cent of the shares. According to Forbes, his net worth is $US59.4 billion and each year since the IPO, Zuckerberg has added an average of $US9 billion to his net worth.
Don’t just focus on the next round of funding – A good mentor is valuable in challenging you to consider the implications of funding. It is far easy to become a “funding addict” getting carried away on the funding roller-coaster that is deemed success, having someone to help maintain commercial discipline in the growth of your venture, asking the difficult questions and getting you to re-focus on the key goals and outcomes that get you to a considered funding round, taking into account the potential implications to your share dilution of the business..
In the wake of the shifting investor pool, entrepreneurs will need to tighten their ship and market their business most prominently. The question investors really want answered: Are you the next Uber?
Alan Moore, International Business Transformation Leader and Director, RANDEM Group
