Paul Ciriello, Strategic Advisor to Blakes and our clients, answered our in-depth questions about the current fundraising environment, and the dos and don’ts of raising capital as we head into 2024.
Paul is the founder and Managing General Partner of Fairhaven Capital Partners and Milk Street Investments, a predictive analytics augmented investment platform. Together, these funds have invested about US$500-million in over 80 early-stage companies in the United States and Canada. Based in Boston and Cambridge, Paul led investments and generated substantial exits in cybersecurity, enterprise infrastructure, mobile technology, financial services, food and beverage, logistics and supply chain, and property technology startups. He has served as a director on the boards of many startup companies and an advisor to many others.
1. As an investor in both Canada and the US, how do you feel about the current environment for companies looking to raise funds?
We have been operating in a challenging environment. But there are many signs that the worst is behind us. Overall, for companies in high growth situations and in anything.ai markets, the prospects for raising money will continue to be strong. For companies in other markets and situations, I would expect things to get better as well, but more gradually. Because all markets are generally correlated, as the public market performance improves, the cost of capital declines and the exit markets improve, so will the flow of capital into existing and new private investments.
In the immediate term, the best sources of capital for companies needing to raise money between the last market cycle and the next market cycle, is likely to be existing investors, debt providers and government grants and tax credits. New investors and debt providers have understandably been more cautious during this period, allocating most of their time and resources to their existing portfolios.
One final thought — revenue from a growing business is always the best source of capital for any company, in any cycle and all the time.
2. How do you see this evolving in the next 12 to 24 months?
I think that we are at the beginning of the next cycle in innovation and investment in the private company market. The biggest thing that I expect to see is an acceleration of investment in artificial intelligence-based businesses — across the entire stack and across every area of the economy. Every process in every industry is currently in the crosshairs of entrepreneurs and investors. Remember when businesses rushed to move online? I think that we are at the same stage for anything.ai and this will be one of the big things that defines the new business cycle we are transitioning to now.
Regarding private capital investing, I also think that the private capital herd will be thinned, as smaller funds with non-performing assets have difficulty raising follow-on funds and institutional investors consolidate their investments in larger money center type of private equity and venture capital funds — it is the perceived flight to safety.
Companies needing to raise capital in the next couple of quarters should expect that the process will continue to take longer and be more difficult than in the past. Of course, existing investors and their relationships are still the fastest path to new capital.
Existing investors have the greatest interest in financing your growth and know the company best. As we have seen in the past year or so, new investments may continue to come with valuation adjustments.
Raising capital for high growth companies that meet or exceed market expectations and metrics, e.g., the Rule of 40 for SaaS companies, will always be easier regardless of the cycle. The best thing that any company can do to improve its attractiveness to capital and to acquirors is to execute and continuously demonstrate market value.
Fundraising should be viewed as a strategic sales process. Executives in private companies should always be raising (ABR). The fundraising process is not so much a task to complete when you need money, but more of a continuous activity. Meeting investors, familiarizing them with your company, understanding their investment interests and building relationships are the core of the process. It is never a good idea to ask someone for money the first time you meet them, so start as soon as possible and keep it up throughout your entire journey.
For companies raising money for the first time, the next 12 to 24 months will likely continue to be challenging but will get better. We are already seeing green shoots of new companies and new founders defining the next cycle. The seed stage market has been quite robust in the past few years and will continue to be strong going forward. The reason is simple — the greatest value creation occurs at the earliest stage when the risk is the greatest. So, keep on developing great ideas and organizing the best people. Persistence is the hallmark of winners.
If you fail in your efforts and you think that you have a good idea or market, do not give up. Instead, adopt an attitude of adaption. Listen to feedback and respond to what makes sense to you. Never quit founders and operators are sometimes affectionately called “cockroaches” because you cannot kill them — be an adaptive cockroach!
3. What are the things a company should be certain to do in preparing to approach potential investors?
The most important thing is to have a good idea that matches the interests of the investor. Remember, good things happen to good companies. Creating real value that third parties recognize is the best way to go to market. Investors want to back high-potential opportunities and high-functioning teams. So, Number 1: build a good company — it will show. Number 2: do your homework on the investor community and concentrate your investor development efforts on the investors that are the best fit. Number 3: know your market and what makes it tick and understand the exit criteria for buyers because it is exit potential that drives investor interest. Investors are interested in making a return on invested capital, and they want to see that you are aligned with their interests and see a path to generating the big return. Alignment is important. Execution is everything. Building the best team that you can and focusing on demonstrable results creates a good company.
Like everything else, a strategy — a way to measure your efforts and adapt to market feedback, is critical. You cannot manage what you do not measure.
4. Are there any things that are important to avoid?
Going to market too late and being unprepared. It is best not to wait until you are out of cash to look for capital. I know this sounds obvious and of course no one wants to be in this situation, but it happens a lot. Your probability of raising capital from new sources when you are running out of money declines every day, and your leverage on terms is on the same curve. If you can avoid this dynamic, it will always be best.
5. If a company is approaching outside investors for the first time or looking to attract new investors, what are some important steps for identifying the right investors and for engaging with them successfully?
Continuously building out your network of connections for business and investor development. Who you know and who you have access to reach are basic building blocks of success in everything that we do. Make sure that you give it the priority that it deserves. A few summers ago, we hired a college graduate as a summer intern. She spent her entire summer building connections with people in our relationship graph. Today, she is the national head of sales recruiting for a high-growth tech company in the United States — a super connector.
With a good network of connections, you are ready to go. Always try to meet investors when you are not asking for money. I call this setting the table. Make it your business to get to know investors. You get there by building and leveraging your network to gain access. Maybe you could look at investors who went to the same school as you or worked at the same company as you or have an investment focus that is aligned with you and your company or have a special interest that you meet. Try to understand what makes the investors you want to approach tick. In addition to market focus, what is the investor’s decision-making process? At what stage or stages do they invest? What is their ticket size? Is there a geography limitation? Are there any general metrics that are preconditions for them — like revenue at some minimum or pre-revenue stage? Is there a partner with direct experience in your market or technology or model? Basically, be smart and prepare.
The other thing is to develop a narrative or an investor deck or presentation that is not your sales deck — but one that is oriented toward the investor’s perspective about market size and growth, the driving forces for the opportunity and the way in which you are building the company to succeed. Always think about how to answer two questions: “So what?” and “What will I get from the investment that you want me to make?” Of course, what you present to investors will be different based on the stage of your company, the market and the industry. The one thing that is always critical is the team and its ability to make it happen.
6. When should a company start the process of seeking investors?
Today, tomorrow and every day. You can never be too early to develop relationships with investors and understand their interests and decision-making process. Better information leads to better outcomes. It is good to consider fundraising as one of the primary responsibilities of the CEO. ABR is a good mantra for all founders and executives to embrace.
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