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Startups

10 Capital Fundraising Considerations for High-Growth Companies

Here are 10 things leaders of fast-growing companies should consider when going through their fundraising process.


Here are 10 things leaders of fast-growing companies should consider when going through their fundraising process.

Fast-growing companies and startups often need capital to fuel their ascent. When attracting investors and negotiating rights, you should understand how your company is valued and what that means for fundraising. Here are 10 considerations to keep in mind when valuing your company and determining the capital you may need.

 

1. Assess Your Opportunity

The first step is to evaluate the size of your target market and determine the level of demand for your product or service. Consider your unit economics, which include production costs and profit margins. With this data in hand, you can begin to project how quickly you may be able to grow.

2. Estimate Your Capital Needs

Put together a long-term financial model to estimate how much outside capital you may need to take your company to the next level. This can help produce a “use of proceeds” statement for investors that shows how funds support growth plans.

You’ll need to make some assumptions. Look for advisors and mentors early on who can offer feedback and challenge these assumptions before presenting to potential investors. Their input can help ensure your financial model is sound before you go into a pitch.

3. Project Growth and Set Valuation

New prospective investors will project your growth and set the company’s valuation using the financial model, use of proceeds and other information you provide—as well as their own expertise and experience. Remember that your company’s capacity to achieve or exceed investors’ expectations will drive future equity value.

4. Evaluate the Competitive Landscape

There are always competitors, even if it’s unclear at first who they are. Financial advisors can help you understand the competitive landscape by using their network of investors to gauge the level of interest in a certain sector.

If interest and competition are high, in your pitch you’ll need to focus primarily on how your product or service sets you apart. But if it’s low, you’ll likely need to first educate investors about the industry and explain why now is the best time to invest in your company.

5. Plan For Later Rounds

The rights you negotiate during early funding rounds typically set a precedent moving forward. Later-round investors will want to protect their investment and they’ll probably want, at minimum, the same rights as those granted in prior rounds.

6. Weigh Common Versus Preferred Equity

Generally, business owners can issue two types of equity to new investors. Common equity is typically issued in early rounds, often to friends, family and seed investors, and provides limited rights. Preferred equity is usually issued in later rounds, providing minority investors with protective rights, which can include board representation, liquidation preferences and drag-along rights that prevent the company from selling without the preferred shareholder’s approval.

7. Negotiate Your Rights

Valuation and liquidation preference are largely driven by competition among investors who are trying to lead the round, as well as the perceived value of your company and the risk assessed in reaching financial targets. The more investors competing to lead the round, the more leverage your company has during negotiations. Generally, drag-along rights, protective provisions and board seats are negotiated venue rights, with specifics that vary among companies and investors. Negotiations are largely driven by the interests of the company and investors—and what each group values most.

8. Understand Liquidation Preference

One of the protective rights sought is liquidation preference. This gives preferred shareholders the right to receive proceeds from a sale, wind down or liquidation before any proceeds are granted to the tech company’s founders and common shareholders. Essentially, this is a right that provides new investors with downside protection. It’s often helpful to keep the terms simple during negotiations.

9. Diversify Your Investor Partners

There are advantages to attracting a diverse pool of investors who are prepared to weather any storms your business may experience. For one, you can leverage their unique expertise and market insights. Be sure to also consider each investor’s interests and whether they’re aligned or competing with others. Determining how many investors to bring on also depends on who will be the lead and what you must give up in order to attract others.

In addition to capital, investors can offer expertise, experience and access to large networks. Determine the area where you need the most help—whether it’s sales and marketing, engineering and product development, or expansion abroad. Research how potential investors have helped other companies in the past and solicit feedback on any benefits or challenges those companies experienced.

10. Acknowledge When You Need Help

Navigating the process of finding investors and raising capital can be complex for high-growth companies and startups, but the journey is an exciting endeavor. Learn more about how to scale smartly by visiting jpmorgan.com/startups.

Innovators need a bank that’s seen it all. J.P. Morgan can unleash a startup and high-growth company’s potential at every stage of growth—from pre-profit to IPO—with simple solutions that can scale in a heartbeat. With our unparalleled expertise and world-class network, we’re the only bank you’ll ever need.



© 2021 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content.

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