Why Does a Founder Raise Capital? | AWM Insights #109

Why would a founder raise money? To turbocharge growth of the company. The company can grow faster from taking outside capital. In exchange, the founder is giving up partial ownership of the company. What should investors be looking for?The majority of companies in venture fail. It is wise to be skeptical and thorough. It isn’t enough to see a teaser pitch deck and start writing checks. Access to the data room and diligence in reviewing financials, management team, and legal documents leads to better outcomes.     The best venture capital investors and founders look for a win win scenario. The VC investors get outsized returns and the founders get to build and grow their startup into a successful, sometimes dominant business. They also usually exit with millions or sometimes billions in liquidity.Have questions for an upcoming episode? Want to get free resources, book giveaways, and AWM gear? Want to hear about when we release new episodes? Text “insights” or the lightbulb emoji (💡) to Brandon at (602) 704-5574 to join our new AWM Insights Network. On an iPhone? Click HERE to join. EPISODE HIGHLIGHTS:(0:55) Why is a founder raising capital? What is the money for?(2:00) A venture company doesn’t have to raise outside capital but to grow and scale to become (2:22) Venture capital and tech are synonymous.(2:47) Deciding how much money to raise is a tough question for a founder. The more money a founder asks for the more ownership he or she will have to give up.(3:15) Owners and founders try to minimize their dilution of ownership.(3:50) Current market conditions are a big factor in to how much to raise and the valuation a company can raise money at.(4:41) A founder and client who just raised money before the market tightened is setting strategy on how fast to use the capital. Using the capital will create more growth but will also lead to the need for another fund raising round fairly quickly.(6:10) Example: A Web 3.0 company is trying to raise a $100 million at a $500 million valuation. For the math to work and to return a 10x, the company would need to be valued at $5 billion in the future. It is very difficult to create a company that grows to that kind of valuation.(8:05) You must be thorough. A teaser deck is often what you see being sent around to get you interested. An investment should never be made off this incomplete information usually produced by the marketing team of the company.(9:05) Investing directly in companies and their founder is very similar to investing in venture capital funds. The due diligence if requirements are very similar.(9:31) A data room is created, usually hosted in the cloud, and access is granted to investors to be able to download and review.(9:42) Financials with revenue and expenses, the formal pitch deck, legal documents, and information on founders are normally in the data room.(10:40) Proper time and research needs to be spent reviewing this information and being skeptical can save you from making poor investments. (11:50) Reviewing a teaser deck is not enough to decide whether to risk your money. (12:47) If you get an opportunity to invest in an early stage company, immediately gather more information. Just asking for access to the data room will weed out a lot of the pretenders.    (13:42) Venture capital as an asset class has been very good in recent times for investors. (15:12) Individual investors shouldn’t be making investments directly into startup companies. These direct investments take an incredible amount of time, experience, and resources to be successful. The better way to participate is through venture capital funds.