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Smart capital: the case for seeking start-up funding from investors who lend their smarts
Tue 25 October 2016 - 12:37 pmFeatured | Investing | Raising capital | Startup | Strategy
By seeking out ‘smart capital’, as distinct from seed funding, early stage SMEs can enhance their business acumen, avoid unnecessary start-up mistakes and increase their appeal to prospective investors, according to Kylie Hammond, founder and CEO of Director Institute.
“Smart capital is money from an individual or group of individuals who can, by sitting on an investor advisory board, provide an early-stage business with value beyond funding; for instance, experience, knowledge, mentoring, advice and access to their business networks,” Hammond explained.
She spoke to Dynamic Business about the advantage of ‘smart capital’ and how early-stage SMEs and start-ups should go about obtaining it.
What is the value of smart capital to early-stage businesses?
“Not only does ‘smart capital’ give start-ups a much needed injection of cash, but it brings in expertise that can help a business grow, refine their strategy, managing risk and, consequently, avoid unnecessary mistakes.
“Smart capital has a number of advantages over using seed finance, which is often difficult to secure without substantial revenue turnover and a business track record. Seed finance is also quite expensive and lacking in flexibility on repayment terms, whereas smart capital is usually more receptive to aligning with the growth and success of the business.
“Bringing in smart capital, via an investor advisory board, serves three purposes:
- Access to critical funding – smart capital brings in the seed capital needed to expand the business, hire people, further enhance the IP, register patents, test the market, run a pilot and gain even more compelling ‘proof of life’ metrics and results.
- Talent and expertise – smart capital may also help bring in high-profile individuals who can open new doors and help win business. Ideally, businesses should try to secure at least one entrepreneur on their board who has successfully grown a similar business venture – this carries a lot of weight in a market filled with start-ups wanting to fund their bright ideas with other people’s money.
- Gives sophisticated investors confidence in your venture – Securing smart capital early can help businesses further down the track when they are looking to raise larger amounts of capital. It will give sophisticated investors confidence in the business and comfort that there are other advisors and board directors with ‘skin in the game’. This may help address concerns about not achieving a satisfactory return on investment.”
What must people do prior to seeking smart capital?
“Firstly, you need to believe in your business – don’t hedge your bets; instead, put all your efforts into the business. Don’t get distracted by other ventures or back-up plans – as soon as you have a back-up plan, you are basically indicating you don’t believe in your business. If you’re not 100% confident you are going to succeed, don’t take funding from investors.
“Secondly, get proof of life. It is crucial you have a business model that can demonstrate revenues and profitability, usually within one to three years. Don’t be one of those early stage businesses that can’t show profits, and therefore returns to investors. If this is your business, get some advice as you’re going to find it extremely difficult to fund and you may need to refine your business model.”
What should start-ups look for in an investor?
“Early-stage SMEs and startups look for investors who:
- are eager to be a part of their advisory board – it’s a relationship that goes beyond a financial transaction.
- have grown a business similar to their one – they can share insights into growth strategies and help start-ups avoid mistakes.
- have broad knowledge, rather than narrower, specialized expertise – they need to be able to understand numbers and business contracts as well as broad commercial acumen to assist the business in more practical ways.
- are well connected – an extended network can open up interesting doors for new business opportunities.”
Are start-ups the only beneficiaries of smart capital?
“Smart capital can be leveraged to assist early stage businesses commercialise their business idea or technology and can be a critical to getting a business to the next stage of its growth cycle. Smart capital providers often support businesses to become a more-investible opportunity and prepare the company for more significant rounds of Private Equity or Venture Capital. Smart capital is also leveraged by business owners who want to take their business to another level of growth and need an injection of capital, ideas and expertise to reach a new milestone such as opening up new markets, launching new products or global expansion.
“Established SMEs can also benefit from bringing in smart capital to their business and it can be an ideal way to release some equity in your business in preparation for an overarching exit strategy. At all stages of a SME’s growth cycle the benefits of tapping into smart resources and investment are significant.”
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