Building a strong and supportive cap table – Part 1
External capital may be essential to fuelling your start-up’s growth but, as a founder, diluting your ownership can feel expensive. This trade-off can be worth it if the cash lets you pursue a large market opportunity and increase value for shareholders. However, to give your company the best chance of successfully scaling beyond start-up, it is critical to have experienced and supportive investors on your cap table.
Of course, sometimes the most important aspect of a capital raising is to get the cash in the door to survive and grow. Cash is still king and not every company has the luxury of choosing which investors to take on. But if you are fortunate to be in a position to craft your own cap table, aim to assemble a diverse set of skills and experiences that will help your company succeed. Over the capital raising journey, look for:
- capital partners that can offer brand, credibility and long-term funding over multiple rounds;
- founders or former start-up executives that can provide strategic and operational advice gained from experience with similar business models, industries or customer groups;
- other investors, like family offices or high net worth individuals (HNWs), that have domain expertise or a network that can help the company and can fill future rounds;
- a secondary fund that can help founders, early employees and investors realise liquidity; and
- professional advisors and experts like consultants, lawyers or accountants that can supplement gaps in the skillsets of the team.
Most importantly, your investors should be supportive. A passive investor is better than one that distracts the company from its core focus, tries to interfere operationally or leverages rounds for their self-interest. But if an investor can add value, is supportive of the company’s vison and strategy, and brings skills, experience and networks, you should find room on the cap table for them.
At Aconex, most of our fundraising took place well before the prominent VCs of today were active in Australia. However, we were fortunate to have a great group of HNWs around us in the years before we raised nearly $60m from US growth equity investor Francisco Partners. These HNWs were more than just investors. They added real value to the business, as I will discuss below.
This two-part blog post will explore how to build a cap table that matches each stage of your company’s growth – and what to consider when choosing your investors if you have the luxury of doing so.
Who, When and What?
It is important to target the right type of investor at each stage and to build a bench of supporters who can plug gaps in the team’s knowledge and experience and who can facilitate future rounds. Avoid wasting time pitching to investors that don’t typically invest at your stage, or that are likely to have different expectations on control or economics.
Early Start-up Stage (Pre-seed to Seed)
When raising an early round, it is likely the company has little or no revenue, lacks strong indicators of product-market fit and may have only a minimum viable product (MVP) in market. At this stage, the lack of substantial progress can make an equity investment particularly expensive.
Aconex’s first round cost us nearly one third of the company. Granted, we had nothing more than a business plan to show, and cloud services like AWS that can get an MVP to market cost-effectively didn’t yet exist, but this was very expensive equity. That’s why it is important to ensure you get value out of your cap table.
Seek out strategic investors in your early capital-raising:
- with early-stage experience, who have been founders or operators in the same industry (Construction Tech or FinTech, for example), are familiar with similar business models (such as B2B SaaS, marketplaces or B2C), or have sold to similar customers (enterprises with 1000+ employees, restaurant SMEs, tier 1 general contractors, and so on);
- who believe in your vision, the intensity of the problem you are solving and are willing to back the founding team; and
- who will have time available to support you with their skillset in the early days as you and your team look to find product-market fit.
The company still needs help proving there is a market for its product, so the terms, valuation and brand name of investors are less important than the support they can provide in this area.
At Aconex, Rob and I were fortunate to have very helpful and experienced founders like Craig Winkler (MYOB, Xero) and Martin Hosking (LookSmart, Red Bubble) and business leaders like Adam Lewis (MD of McKinsey & Co) and Michael Robinson (Managing Partner at Allens Arthur Robinson) as early shareholders. We could pick up the phone almost any time to these investors and others who had been in our shoes and could lend their experience to whatever challenges we were facing.
Strategic angel investors like these will generally also have their own, broader angel network that can support the company and fill gaps in your expertise.
Recently, accelerators have become another option for founders. Startmate, Skalata Ventures and Galileo Ventures have started to offer capital alongside their core support programs . These can be a good option, particularly for first time founders that don’t have investor connections or experience operating a start-up. Accelerators can also help founders connect with customers, investors and potential employees.
Whatever the make-up of investors at this stage, they should support the founders as you iterate towards product-market fit.
Start-up Stage (Seed to Series A)
Once your company starts generating predictable revenues, can validate demand for its product and is growing its customer or user base, it is ready for the venture phase to accelerate that growth.
At this stage, VC firms both in Australia and the US will consider making serious investments of $1m – $5m+. When considering investors for this round, it is critical to balance:
- Capital partners that can lend weight, credibility and future capital to the business; and
- Strategic investors that bring domain expertise.
VCs can provide a strong brand, a valuable network of other founders and investors and badly needed structure and governance. However, most are generalist investors. Bringing strategic investors on board can help with more specific challenges like ramping your Go to Market activity, understanding the dynamics within customer organisations, or learning how to handle objections in the sales cycle.
Family offices and HWNs can fit into this category. There is a wide range of investors in the space. Some are more active in – and knowledgeable about – venture finance than others, and they have varying levels of capacity. But many will have made their wealth in areas similar to yours. They can bring more strategic and tactical insight than generalist investors and will often have a narrower but deeper network in your space.
In the early days of Aconex, there was little depth to the VC market in Australia, so we were reliant on family offices and HNWs for this stage of the business. We did, however, prioritise investors that could add value beyond capital, regardless of cheque size. In addition to Rob’s experience in the industry, we had investors like Ted Yencken, with deep construction expertise, who brought knowledge of customers and the intricacies of the market.
What to look for in a lead investor
When rounds become larger, it is particularly important to get the right lead investor. The lead will set terms and take an active role in your company, including on the board and in dictating future rounds. The quality of the lead will also influence other investors’ decisions and confidence in the business. Getting angels and funds to commit is not difficult, but landing a strong lead can be. Putting the right ‘domino’ in place will make it easier to close other investors.
The lead should have a strong brand and be able to demonstrate how their track record in your industry, with your business model or with a specific customer set will add value. You should speak with other founders in the lead’s portfolio about what it is like to work with that investor.
Your cap table should now be set up to provide the company with long-term capital, support in scaling the GTM model and a network of potential investors and talent to help the business grow.
In part 2 of this blog post I’ll look at how to expand and manage the cap table as your start-up matures into a scaleup.
