Authored by Kevin Wu
If you don’t want to raise capital, don’t become a CEO. Raising capital is a CEO’s most important and time-consuming job. Even the Top 5 Most Valuable Companies in The World (Apple, Microsoft, Alphabet, Saudi Aramco and Amazon) today have previously raised funds from investors before going public. In this article, I will provide a brief overview on how to raise funds for an early stage company if you are based in Malaysia or South-East Asia in general.
About the author: Kevin is a 4x Founder, Listed on Forbes 30U30 – Tatler Gen. T – Prestige 40U40, and has previously raised funds from angels, family office, VC and corporate VC.
PRELIMINARY CONSIDERATIONS BEFORE RAISING YOUR FIRST ROUND
Key considerations before going out to raise:
What stage is your start-up? i.e. idea, pre-product market fit, product market fit, growth stage
Which sector? i.e. AI, food technology, platforms, B2B SaaS
How much funds are you planning to raise? US$50k - $100m
Debt vs. Equity fundraise?
If equity, how much equity are you willing to let go?
What type of investors are you looking for? Strategic investors include: capital, technical, network, brand name, industry expertise, mission alignment etc.
Mode of fundraise? Angels, friends and family, venture capital, corporate VC, private equity, IPO, SPAC etc.
Today, there are plenty of funds that invests in a range of sectors with varying cheque sizes. Depending on the stage of your start-up, which sector and cheque size, each investor will have its own set of criteria and qualification before offering to invest.
For simplification, let's distinguish between early stage (Pre-Seed / Seed) and later stage (Seed / Series A) investment deals. For early stage, the most common routes for entrepreneurs would be to self-finance from savings, friends and family, and angel investors. As your company launches its products/services with some proven traction, it is more typical for entrepreneurs to approach early stage VCs for Seed / Series A round (cheque sizes around RM200k - RM2m in Malaysia or generally between US$100k – US$2m in other regions).
REACHING OUT TO POTENTIAL INVESTORS
You can reach out to potential investors by way of personal referral from a friend to the investor (the best way), email, LinkedIn, pitch at events etc. As an entrepreneur, you are expected to be heavily involved in early stage discussions so you need to have a short pitch deck to present to investors telling them what your company does, traction, business model and how the investors can expect their return. For early stage start-ups, investors place a stronger weightage on the competency of the founding team due to the lack of data and proof of concept. In my view, early stage investors don’t expect the team to have already figured out everything, but do expect the team to have a goal to address a sizeable total addressable market, but at the same time being flexible enough to adapt as the start-up journey continues.
STRUCTURING THE DEAL
It is best to get professionals / legal advice regarding how to structure your financing round whether it is debt vs. equity, how much % to give away, nature and type of shares i.e. ordinary, preference, redeemable, convertible etc. Setting up the right structure early is extremely crucial to lay the foundations for future investment rounds.
Once the investors are confident with your deck, your management team and that your start-up aligns with their portfolio, investors will typically issue a term sheet which summarises the terms of their investment i.e. how much their looking to invest, whether they are seeking for directorship / management control, nature of shares etc. Best to get a professional to review the relevant terms to ensure it is not out of the market norms.
CLOSING THE ROUND
Once the term sheet is signed (by convention, it is typically non-binding), investor(s) may begin due diligence on the company whilst at the same time preparing relevant documents i.e. Shareholder Agreement, Share Subscription Agreement etc. to close the round. These documents tend to be voluminous so be sure to appoint a professional to handle the workflow. The typical timeframe from signing term sheet to completing the main documents is approximately 2 - 3 months depending on the requirements from the investor and the complexity of the due diligence.
There are many different methods to raise funds for your company. Always remember that fundraising is a full-time job that requires a large amount of time and energy. In terms of timeframe for fundraising, it is highly advisable to budget your start-up/company 9 - 12 months to complete a fundraising exercise to ensure you have sufficient runway for your business.
If you have any questions, you may contact me email@example.com
Kindly note that this legal article does not, and is not intended to, constitute formal legal advice by the Firm, instead all information, content and materials available on this site are for general informational purposes only. If readers require further clarification or legal advice, he/she should email firstname.lastname@example.org.
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