Property Portal Watch founder, former REA Group CEO and serial investor Simon Baker delivered his top tips and advice for companies in the process of raising capital at yesterday's Best Practice Master Class in Bangkok.
Thirty five C-level and portal founding personnel attending the Master Class as part of Property Portal Watch's Bangkok Conference spent the day gaining insights from Baker on the best approach to running, structuring and driving monetisation for their business.
Baker who has been investing in both established and emerging online businesses over the last fifteen years, has participated in Angel rounds, undertaken capital raising (RESEM being the most current) and has helped list many companies including the Mitula Group and Real Estate Investar last year.
Baker told the Master Class participants there are two classes of shareholders:
"There are the people who have access to funds and knowledge, who help grow your business. They're the ones you like.
"The ones you don't want are those from your customer base. They're the mums and dads who put in three or four grand, it seems wonderfully endearing.
"Until you list the company and they all want to exit their position. Then they attack the share price because they all want to sell. You end up having to struggle to get back to the right growth trajectory.
"You have to balance it up. You need to widen your shareholder base but you don't want to go too broad to unsophisticated investors. you want sophisticated long term partners."
Baker says it's critical to have a strong balance sheet and to build the company into a real business to release value.
So when do you raise capital, how much and from whom? How much equity do you give away?
Baker says companies must give equity away to make money over time. He adds they should raise as much money as they can early, and frequently.
Here are his top tips for what to do and what not to do when raising capital.
1. Capitial raising is an ongoing process.
"You raise it, then you start again," Baker says. "You don't want to compromise your position by not raising enough.
"At the end of the day investors are investing in people; you're backing them to deliver."
2. Be realistic about forecasts
"The number of rubbish forecasts you see is ridiculous. Over optimistic; on what planet are you going to raise capital faster than Rightmove or REA?
"Life's not driven by an Excel spreadsheet; so crazy high forecasts are not on. You'll end up being penalised if you don't deliver."
3. Be realistic about valuations
"So many people do this. On what planet is this company worth X?"
The problem with high valuations is you end up focusing on things that go wrong. We said it was worth $18 million but it should have been worth $10M. I'm trying to justifying the 18, now how an I going to get to 20? The shareholders want a return.
"The early guys don't care because they got in when it was worth one or two million; they're already into the money. But the new guys they want to protect themselves."
4. Everyone has to be aligned
"Don't get into the situation where you have 'a new best friend who becomes your worst enemy'. I've had nightmare shareholders threatening to call an EGM every second week, telling management to IPO, but the board doesn't want to do it.
"You'll find investors just want to get out in a situation like this. I'll take the money and run.
"This means being realistic."
5. Be focused and clear on your mission.
You need to know exactly what you want to do and why you want to do it. so when you talk to an investor you can say, 'I'm going to do it this way, a,b,c so I'm not going to go off track.
"Don't have a long, unrealistic to-do list. I'm going to do this and that and that...it's better to have something succinct and concise for the now and sell the opportunity.
"Investors don't care what's over the hill they want to see what you're doing now and know you can deliver."
6. Focus on winning in one market rather than losing in multiple markets.
"For example with iProperty I'd like to see them win in Malaysia, Singapore and Hong Kong. We didn't concern ourselves with India and the Philippines or Taiwan. We didn't know what was there. Instead, by focusing we got it done."
7. Plan to raise money 24 months ahead.
"It takes a lot of time to raise money. Rent.com.au CEO Mark Woschnak has been raising money for 15 years. Real Estate Investar CEO Clint Greaves has been raising capital every week for four years.
"Don't end up compromising and stagnating. You reach two or four million and you stay there, but then it's extra hard to start off again. Don't lose momentum and focus.
"Better to under promise, over deliver and look for the milestones in future rounds. Set yourself targets and prove yourself. show you're worth the investment."
"And finally, look after the people who backed you in the early days. This is very important. The early investors are the ones who really took the risk."
8. Get money on board that doesn't come with hand cuffs
"Avoid investors who want monthly reports; straight money investors who won't help, but rather add cost, aggravation and red tape.
"They end up taking value from the business because they're preventing you from doing what you do in order to comply with their demands.
"They start telling you how to run your business. They have their own agenda. They're going to do this and that and you have to do stuff for them.
"Watch out for large corporations looking for ways to take advantage. Yes they're smart and sit on the board with some good advice.
"But negotiation takes place at the top. Execution is down at lower levels of the business. Maybe they don't want to cede their branding to you; there's always some kind of rubbish to deal with.
"And once they're on your books they're your exit option, so you're almost signing up your exit today. You may not want to do that.
"There are large strategic investors who help. Those that help can open the floodgates in terms of traffic, but they're few and far between. Look for smaller strategic investors who will roll up their sleeves and talk to you."
9. Be careful.