When it comes to raising finance, it’s a minefield out there. Different types of rounds, endless terminology… it’s difficult to know what’s best for you. Truth is, every capital raise is individual, just as every company is unique. Good thing there are a few options to choose from.
The traditional funding round
The archetypical and most common structure for an early-stage equity investment round is one where the company raising has a specific goal (for example, to develop a new product or grow its staff base by x%). It requires a specific amount of capital to achieve that goal: this is its minimum target amount.
Often the monies from the lead investor are not transferred until the company reaches this agreed minimum target and all investment is banked on the close of the round.
Many companies desire to raise more than the minimum target amount – though the extra funds are not crucial, they can serve to boost the company’s development, for example by allowing further research into a new product or expediting plans to break into a new market.
It is vital for the company to outline from the outset what the maximum overfunding amount would be – and this should be agreed with the lead investor – along with how any additional money would be used.
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The traditional funding round approach tends to work particularly well for younger companies, about to embark on relatively small rounds. Other useful tools to explore at this stage are convertible loan notes) (CLNs) and advanced subscription agreements) (ASAs), which can help companies not yet in a position to value their business.
For companies that are still early stage but a little further down the line, the challenge is different. Often such companies will be in revenue or have a comfortable nest of cash already backing them up. They’ll be looking for a larger sum of growth capital to be rolled out over a longer period and for less-specified spending.
Raising a larger sum of money, say for a Series A or B round, would ordinarily require either a series of small rounds throughout the year, or a single large round that would close only if a full target was met. Both options require a lot of ongoing effort and resources, and don’t guarantee funding at the end since they use the established ‘all or nothing’ approach; if the round doesn’t hit its target, the company gets nothing and must spend even more time and resources on launching another round.
If the lead investor/investors are comfortable that the company is developing and growing, they will likely be happy to contribute capital to facilitate this growth at the point at which they review the investment, rather than waiting for others to demonstrate their commitment first.
This is where the ‘soft-close’ round comes in. With a soft-close round, the company still has an overall target it needs to reach to achieve its goals, but this is broken down into a number of tranches, with monies transacting as and when these smaller targets are met. Such soft-close targets can be flexible and based on the needs of the company.
This staggered approach means the company doesn’t have to wait until the close of a big round – which can last a long time with no guarantee of success – to start using the funds to develop and maintain its business.
Soft closes are usually used for somewhat later-stage companies that are already generating revenue and are in a good cash position, which require capital to continue growing. For investors, the benefit is clear: they are able to get involved in the opportunity at any stage rather than wait till the full amount is accounted for, happy in the knowledge that their money is still enabling the company to progress and hit real goals.
This one is for companies that have already reached their minimum target through a number of sources of investment, but have a requirement for more.
Midway through a capital raise, when the target has already been set, something may shift, the goalposts might change, resulting in a need for extra capital. A new target demographic may emerge, or a new opportunity for product testing. In such an instance, a lift round can be an ideal route to financing the additional cash required.
At this point, companies can come to SyndicateRoom to extend the funding round over the minimum target up to a maximum amount of equity the company is willing to give away at that valuation.
For investors, lift rounds are an attractive proposition as the appetite is already well and truly there – as illustrated last week with the close of Alert Technology and Peptinnovate, two lift rounds that raised a combined total of ~£3.8m.
While these are the main types of private equity raises you’ll see on SyndicateRoom, it’s worth remembering that each company has its own unique needs. We’d be more than happy to talk to you about the best route to financing. Drop us a line at firstname.lastname@example.org.