Be investment-ready

Build your capital raising strategy

Every fundraising strategy comes with costs (time and money), so it is critical to approach capital raising with a robust strategy that not only supports the business’ strategic goals, but also resonates with potential investors. Otherwise you may end up with a poorly structured deal or an unproductive search for capital.

Understand the timing

Prepare for the fundraising process to be more time-consuming than anticipated, particularly in the current market. Factor this into your planning and make space to allow management to dedicate time to fundraising, over and above their usual tasks and focus. The key is to start early. By preparing well in advance, and ideally before the urgent need for funding arises, you can cultivate a network of investor leads through early introductions.

What is your investment story?

In early stage businesses, investors often look to invest in a compelling founder team. This can be a critical part of the investment story. Carefully appraise the skills and experience of the founder and management team, as well as the board, and communicate how they complement each other. Be prepared to demonstrate your collective ability to execute on your business plan in your investment story. Practice your pitch and demonstrate your excitement and belief in your solution.

Articulate the major milestones that will have the most impact on the business, with or without investor capital. Identify which milestones investor capital will help you achieve and the expected timeline. For businesses with a longer journey to the next fundable milestone, particularly in the tech sector, calculate the necessary runway to reach that critical point.

Get on top of your cap table

Institutional investors will be looking for founders to retain significant ‘skin in the game’ even after several rounds of dilution. Founder equity represents more than ownership - it signals the founder’s incentive to perform and to remain with the business, as well as their level of control and influence. It also narrates the history of past fundraising and cap table decisions, which can either enhance or diminish investor confidence.

Avoid numerous passive investors that dilute founder ownership. An unwieldy cap table - including overly generous management share schemes - can be unattractive to institutional investors. Consider how you can streamline and organise these elements (if needed) before engaging with new investors. 

Get your house in order 

Review and ensure that all company documentation (company registers, due diligence information, public (Companies Office) records) is correct, up to date and accessible. Cutting corners can lead to significant challenges, delays and/or the loss of investor confidence.

Target the right investors

Think strategically about what kind of investor aligns with the needs of your business. Remember that money is not all the same, so keep an eye out for potentially valuable experience or networks that an investor could bring. If your growth plans are focused on a specific geographic market, consider looking for investors who are local to that market or have operated there previously, and can leverage their connections to help you grow. 

Before pitching, gain a thorough understanding of the investor's mandate, including their investment objectives, risk appetite, and investment horizon. If possible, talk to some of their portfolio companies. Doing your due diligence on the investor allows you to assess their potential “fit” and also to tailor your investor outreach strategy effectively.

Securing a credible lead investor can significantly influence and accelerate your fundraising journey. A strong lead investor can serve as a catalyst, attracting other investors who are likely to agree to the terms set by the lead investor.

Articulate the exit strategy

Outline how investors might realise returns on their investments. Whether you plan to exit within 3-5 years or aim to build a long-term enterprise will influence the return on investment you need to demonstrate to potential investors.

In our latest M&A Quarterly Update, PwC New Zealand Partner Damian Tuck discusses how to best prepare a business for sale. You can read the article and watch the accompanying video here.

Final thoughts

A well-structured capital raising strategy demands thorough preparation, a compelling investment story, and a clear understanding of your cap table and target investors. By starting early and aligning your fundraising efforts with both your business goals and investor expectations, you significantly enhance your chances of securing the right capital to drive your business forward.

Demonstrate risk management

Demonstrating strong risk practices is crucial for building credibility with investors, as it showcases your business’ stability, foresight, and operational maturity. Depending on the size and scale of your business, consider the following strategies and tips.

Management 

Develop a contingency plan for critical risks in your business. Cybersecurity breaches, supply chain disruptions, and natural disasters are just some of the risks that can have a profound impact on businesses. 

Put in place a risk management framework to identify and assess risks in your business. You should include mitigation measures and record how you monitor these risks. As part of your governance practices, you will need to regularly update and review your risk management policies. 

Board reporting

You should be able to demonstrate clear and transparent reports to the board, which should include risk management. Even if your business is in the early stages, you should start developing rigour and process around your governance practices and board engagement with risk. Your minutes should demonstrate that the board has regular discussions around risk management practices and provides feedback to management. 

Legal

Where feasible, implement a compliance program to provide a roadmap of the various legal and regulatory requirements that are relevant to your business, in New Zealand and in other relevant jurisdictions. 

Ensure you have a robust contract management system in place to manage all of your various partnerships, suppliers and customers. This system should be able to scale with your business as it grows. The earlier you start this, the easier it will be to develop and maintain.

Well protected intellectual property is a valuable asset for startups and is often a key feature of valuation discussions. Investors will want to see adequate protection across your intellectual property portfolio through patents, trade marks, copyright and know-how, and confidentiality covenants. If there are licensing agreements in place (whether these give you the right to use someone else’s intellectual property, or you grant others the right to use your intellectual property), these should be properly documented and robust.

Tax

Engage in proactive tax planning to identify any potential tax issues early. This is especially the case if your business operates in multiple countries, has numerous entities across multiple jurisdictions, or if you have shareholders and/or directors who are tax residents outside of New Zealand. 

Consider whether you are eligible for R&D tax incentives, which can effectively reduce the cost of conducting onshore R&D. This introduces new opportunities, but you will also need to be aware of the specific compliance requirements and associated tax risks. PwC has an experienced R&D team that helps businesses to identify and access this opportunity.

General 

Maintain good documentation practices for all processes and decisions related to risk management. Leverage technology and tools for risk identification, assessment and management. 

Final thoughts

It is important to demonstrate that your business prioritises risk management and encourages proactive identification and mitigation of risks to build operational resilience through strategic planning. By showing that your business is capable of handling risks as it scales, you can build credibility with potential investors. 

Demonstrate readiness

Your business must be able to demonstrate to investors that your house is in order, you have compelling collateral to tell your investment story, and that you are ready to execute. As investors place increased focus on due diligence, and execution timelines are longer than in prior years, being well prepared can mitigate the risk of unnecessary delays and risk in your capital raising process.

Get your house in order

Record keeping is crucial. The Companies Act requires companies to maintain a share register, minutes of meetings, and accurate accounting records. You are also required to file any updates to company details, annual returns, and certain director certificates on the Companies Office website. Review and ensure that your Companies Office records are correct, up to date and align with your internal records (including the cap table). 

Keep an updated cap table to provide a snapshot of all equity ownership, including shares, options, and convertible interests (such as notes and options). This should allow you to see future capital raising scenarios by adjusting key variables, such as the amount raised and pre-money valuation, and allows for strategic planning and negotiation with both existing shareholders and potential investors. 

Ensure that you have clearly documented arrangements with founders. Some documents that investors will expect to see formalised (whether as part of the capital raising or prior to) are: a shareholders’ agreement, share subscription agreements, IP assignment deeds, and potentially founder employment arrangements. This is to ensure everyone is aligned on how decisions are made, how shareholders may exit the company, how shares are issued to any new investors, and to ensure the company owns all relevant intellectual property. 

Set up and maintain an organised electronic due diligence file. This should contain copies of key company documents, indexed to match the topics investors would typically explore during their due diligence process. This proactive approach can significantly expedite the due diligence process and demonstrate your preparedness and professionalism to potential investors. It is also good practice for day-to-day business hygiene.

Lastly, investors will expect you to have your house in order regarding employee contracts, corporate governance, intellectual property protection, contractual obligations, and regulatory compliance. It's crucial to show them that you've not only considered these areas but have also taken concrete steps to address them effectively.

Create compelling collateral 

Create a pitch deck that tells your investment story in the most compelling way possible. A ‘one-to-many’ pitch deck can be used at events to multiple potential investors. A ‘one-to-one’ pitch deck can be tailored for specific investors.

This pitch deck should begin with an executive overview that provides an introduction into your business and the investment proposition. This executive summary is your ‘first impression’ and the key to getting you in the door with investors. The remainder of the deck should give more details about the company, the business plan and financial information (historical and forecasts), and a summary of key investment terms. 

You do not necessarily need an investment memorandum, which is a more substantive (and much longer) document - investors will not often expect to see this for early stage businesses. Instead, focus on getting the pitch deck right and practice your presentation.

Have a strong team behind you

Assess your board of directors - do you have independent and commercially experienced directors on the board? Early stage businesses may not be in a position to appoint experienced professional directors, but external investors will be looking to the commercial (as well as technical) capabilities of your board all the same. 

Have good professional advisers who understand your business (across accounting, legal and tax). This will help make sure your company affairs are in order, and give investors confidence that they are well managed.

Valuation

Approach valuation with a grounded perspective. An overly optimistic valuation can be a red flag to investors, signalling potential difficulties in future interactions and possibly prompting them to seek more protective terms. When positioning your valuation approach, focus on engaging the investor’s interest on how your business is differentiated from others in the market. Demonstrate how your R&D efforts are likely to lead to sustainable growth trajectory and competitive advantage.

Final thoughts

In preparing for investment, you should take steps to demonstrate to prospective investors that your business is well-organised and managed, it has compelling collateral to tell its investment story, and it is ready to execute on a successful capital raising process. Thorough preparation can make all the difference in effectively engaging prospective investors and mitigating risks associated with the capital raising process.