The “Art” of Raising Capital for Start Ups
By Amir Gal-Or
In the course of a usual day in the land of equity capital, I regularly meet with start up and growth stage companies looking to raise funding. There is no end to the possibility of choices in our various sectors of focus- medical devices and services, IT, materials, agricultural, clean tech, to name a few. We listen, we look, we investigate and we decide. Is this a good fit?
The question for the companies, however, is how to approach a fundraising effort in the most timely, productive way that will generate not only success in securing the money, but also a stream of successes resulting from the associated terms of the investment agreement.
If you look on the internet, there are many articles about what to do, how to do it and with whom in order to achieve such success. Rather than cite one or more, I would like to share my perspective, gained from 20 years of experience as a venture capitalist.
In my opinion there are five basic concepts to keep in mind: 1) raise money when you can; 2) remember that venture capital firms/angels/equity firms like to invest in a “dream” – the promise of something wonderful that will solve an existing issue or create a better tomorrow; 3) potential investors need to see evidence of potential success, in terms of the product, the leadership and of course the ROI; 4) best not to put your proverbial “eggs” in one basket - meaning when seeking investment, approach more than one source and start with those with whom you have an existing relationship and then be flexible about the structure of the arrangement; 5) remember that when you secure an investor you are not only gaining money but also a “partner”, so before signing on the dotted line, it is best to consider future scenarios with your new partner and determine if this is in your best interest and that of your company.
Easy to say, hard to implement- I know. But, at the core of it, this is what it takes to fit the round peg in the round hole. A couple of stories that come to mind that illustrate this nicely are those of Shopping.com and Chiral Quest. How did we meet? What dream were they offering? And what made the difference that led to our decision to invest - to become partners?
I remember when I first met Shopping.com. It was 1999. We were in the middle of a search for an internet company which had a business model we could understand. The company offered us a huge dream - to lead the world price comparison system. They had an algorithm which could find almost any deal offered on the net. As for execution, they had a great demo and impressive net coverage.We also felt that Shopping.com was a good match for us because of its clear value proposition and its strong management.
We felt closely connected with the management since we shared the same vision. We also shared the same culture; we were all Jewish Israelis. The management was also very active, ambitious and extremely driven. They had their eye on the ball at all times and had a reputation for getting the job done. At no point did they ever lose faith. The dream was always possible, always within reach.
As for Shopping.com, their management was looking for investment from a global player. We met, we talked, we reviewed and after the appropriate due diligence, Infinity Group decided to take a risk and invested 5 million USD for preferred shares.
Shopping.com was also savvy in terms of planning for the future. Interestingly, Shopping.com had the vision to raise more money than they actually needed and orchestrated an additional round of 100 million USD. What was the reasoning behind this? Well, they felt that you just never know what’s coming around the corner or what the future holds, so better to raise more money than necessary, just in case. This decision ended up being rather prophetic and actually saved the company. Years later, when the high tech bubble burst and internet investment was out of favor, the extra money they had raised when they had had the chance, helped them tremendously. Rather than spending a concerted amount of time on raising more capital, they were able to focus their attention on business and growth.
Yes, there was competition in the market. There were several start ups trying their luck. One start up in particular however is relevant to this story. It was called “r u sure?” This company was backed by the well known founder of ICQ Mr. Yossi Vardi. For all sorts of reasons it was challenging to directly compete with him. At the end of the day though, “r u sure” eventually closed.
Conversely, Shopping.com was red hot. In 2004, Shopping.com made $99 million USD in revenue and had a net income of $12.2 million. Then in 2005, ebay, which was looking to boost its business and expand into new areas, bought Shopping.com for 620 million USD in cash. According to research company ComScore Media Metrix: Shopping.com had been adding customers at a faster clip than eBay. It attracted 22.6 million unique visitors in April, up 15% from the same month a year earlier, compared with eBay, which had 63.8 million unique visitors, an increase of 6% over the same period.
Indeed, Infinity’s risk had paid off.
Chiral Quest is another company that comes to mind when thinking about what it takes to attract the attention of venture capital, to secure funding and from the same investor more than once. It is also a good example of a key component of Infinity Group’s core strategy: the successful implementation of technology cooperation.
Chiral Quest is a technology-based company creating chiral solutions for the pharmaceutical industry, assisting pharmaceutical and biotechnology companies to develop processes for the manufacture of their candidate drugs.
During the review process of Chiral Quest, we learned more about the need in China for high end, pharma raw materials. Concurrently, our partner from Suzhou Industrial Park had initiated and commenced a plan to support such companies. What really attracted us to Chiral Quest, however, was the fact that they had a mature management team that really wanted to bring full scale IP and know-how as well as people from the US to China. There was also the option for a large Israeli customer. We decided to invest.
The structure of the deal was as follows: to invest with money from the local Chinese fund, receive major support from the Suzhou Industrial Park and in turn, Chiral Quest would ‘rebuild” itself as a new entity in Jiashan, China. As always, there were challenges, mainly stemming from cultural issues. And, let’s face it technology transfer is always more challenging then it seems. But a little bit of goodwill goes a long way. There is great support from the local government in China and the team is both dedicated and hard working. We have maintained an open communication from the start and this has enabled us to operate nicely together. Well enough that Infinity has invested twice in Chiral Quest, most recently in January 2009, when it led a 16 million USD B round of financing that included participation by Kleiner Perkins Caufield & Byers China, China Spring Fund and JAIC.
In the evolution of any company, fundraising is perhaps the most important event, mainly because the decisions made during this process will ultimately have a tremendously large and direct impact both on your daily operations as well as your long term progress. Allow me to restate this point again, strategic and savvy fundraising not only secures money to build your business, but also the wisdom of experienced partners who can help you to reach mutual goals.
