Notes from a Small Cap Raise

Notes on a small cap raise

I’ve had the lessons from my time as CEO of a tech start-up running through my head for the past ten years or so. I thought I’d share three lessons (one cap raise, one on Board management, and one on personal stuff) in case they may help amongst the hints and tips of growth through inbound digital marketing.

First some context. I was hired as CEO of a text analytics start-up. An Australian business with a seed investor in London. This was Q4 2007. I was in London. They had some repeatable sales from Universities (mainly in Aus) and very little cash in the bank when I was hired – making a cap raise #1 priority.

Lesson #1 – The Cap Raise

From memory, the cap table value of the business was $1M Aus when I joined. The plan was to do an immediate, interim raise with a Series-A a year or so later. Our seed investor had excellent connections making the interim raise fairly straight forward with them doing much of the heavy lifting.

That allowed me much more time to figure out our target market and generate revenue and we hit Q4 2018 with interim investment in place and solid revenue growth. Even better we were cash flow positive.

So what was the problem?

It was the valuation and amount of our interim raise. We didn’t know it at the time but the financial crisis was about to bite…

We had a good story to tell, so why shouldn’t we try to maximise the valuation for a raise of $2M? We actually had two offers, one for the full $2M ask at a pre-money valuation of $2M; the other for a $1M investment at pre-money valuation of $7M. We were by now cash flow positive so why not take the lesser amount with the higher valuation? We did. Our seed investors were very keen that we did.

I had moved from the UK to the US which was always part of the plan and immediately started on the Series-A round. Now I was doing all the heavy lifting of this raise as well as keeping the revenue growth going. And the financial crisis started to impact. Not from a revenue growth perspective but enough to make potential VCs nervous and be only too keen to ignore the advances of a nomadic Brit with a tech team in Australia and seed/interim investors in London.

Plus, the question of the $7M valuation came up. How do we justify that? I think as a rule investors have so many candidate investments to choose from that they actively look for reasons to say “no”. We were providing them ample opportunity.

So, the higher valuation was proving to be a hindrance (we couldn’t raise at less than a $7M valuation without disappointing our interim investor and looking pretty stupid and unreliable to our new investor) and the fact that we’d only taken $1M rather than the $2M we were seeking was cutting short our runway. A double whammy.

Lesson #1a – don’t get ahead of the valuation curve.

What I hadn’t realised until later was that our seed investor was raising a new fund at the same time we were trying to raise our Series-A. Could this have been why they were very keen for one of their portfolio companies to witness such a large increase in valuation?

Lesson #1b – understanding the motivations of multiple parties and ensuring those motivations are aligned.

Lesson #2 – Board Management

I had an issue with one of our Board members who, I felt, was unbelievably arrogant. He was entrepreneur-in-residence at a local University and we butted heads continuously. When I realised our miscommunications were mainly because he didn’t know what SaaS was, that fed my own arrogance and made me put the shutters up on dealing with the Board as a whole.

And so I broke the golden rule for a CEO dealing with the Board. I never socialised Board content with the Board ahead of time and every Board meeting was a battle with everything being covered in excruciating detail. What should have been a tick box, rapid fire, open discussion quickly turned into the worst day of the month. The fact the Board was split between Australia and Singapore with me in the US was no excuse.

How my own life would have improved had I just got over myself and spent the time briefing them and getting them onside ahead of the Board meeting.

Lesson #3 – Personal Stuff

How many degrees of movement can you tolerate/survive in your life? New job, new role (CEO), new experience (fund-raising), new country…

I had one too many (for me) to make the right decisions regarding my professional and personal future. When things were getting really tough, my personal motivation was to seek stability, so I quit…

Do I regret it? Absolutely I do. Emotionally I needed to reduce the number the degrees of movement so I used any logic I could find to justify the decision. The product wasn’t perfect, I can’t work for nothing as I have new expenses running a house in the UK and the US, etc.

I always believed that a growing SaaS company would attract better multiples if it’s based in the US rather than the UK but did I have to move so soon? If I’d waited 6 more months, I’d have been in a much better position to work through the short term challenges.

If there’s one thing in this post that helps you then I’m grateful. I’ve never shared any of it before, but now seems the right time.

My main regret is that I couldn’t do a better job for the original founder who wanted nothing more than for his technology to be ubiquitous. The company is still a going concern, the technology is probably still the best text analytics engine out there, and hopefully his day may still come. I owe you an apology, sir.

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