The principal benefit of having an early-stage fund in your capitalisation table is that it can help your startup to raise investment. An early-stage fund investor represents an important vote of confidence in your business.
It tells other potential investors that your early-stage startup has been successfully vetted and qualified by a specialised fund. This encourages both existing and potential equity holders to invest more because they perceive less risk.
A capitalisation table, or cap table for short, is a spreadsheet that provides a breakdown of a company's ownership and capital structure. This includes the equity stakes held by its founders and investors. A simple cap table provides a list of each type of equity ownership capital, the share prices, and the identities of the individual investors. It can also include information on new funding, mergers and acquisition activity, and a variety of other potential transactions. It is a key resource for shareholder reporting and is also needed by legal teams in the event that the business is subject to an audit.
A regularly updated cap table helps to keep companies informed about their market value, which is particularly important when negotiating new funding rounds. For current investors, the cap table lets them check who has control over the business. It also allows them to make forecasts about how different scenarios will impact their equity in terms of dilution or payouts. For interested parties thinking about investing, including early-stage funds, the cap table can be consulted to help determine their negotiating position.
Early-stage funds provide capital to young businesses so that they are able to grow, and get equity in return. Early-stage funds can be provided by individual angel investors using their own money. Sometimes angel investors club together into a single entity such as a syndicate to reduce risk and improve their negotiating position when making an investment. PitchDrive deploys both models, empowering individual business angels with digital tools and support, while also supervising the PitchDrive Fund 1 that invests in its own right.
Venture capital funds (VCs) also provide early-stage funding. Investment banks are an important source of venture capital. Unlike angel investors, they generally invest using other people’s money and that of institutional funds. On the whole, VCs look for startups with long-term growth potential. VCs are an increasing source of funding for startups that lack sufficient access to capital markets, bank loans, or other debt instruments. Despite the pandemic, there was $76.4 billion of venture funding invested worldwide in the third quarter of 2020, up 9% year on year according to Crunchbase.
Cap Table Maintenance
A well-managed cap table is clearly an important resource for management and investors seeking up-to-date and reliable data. That is why cap tables need to be customised around individual business requirements and regularly maintained in order to provide decision-makers with accurate and current information. The close monitoring that early-stage funds perform provides a useful incentive for keeping your cap table in good shape.
The main benefit of having an early-stage fund in your cap table is the access to capital that it provides which will enable your business to grow. This is especially true of the technology sector where capital requirements are high at the outset. But early-stage funds can also be a valuable source of mentoring advice, expertise, and networking backup.
VC funding is often used as a proxy measure of innovation within sectors and geographical territories. Innovation is closely associated with growth potential in the eyes of potential investors. A recent McKinsey study suggests that companies that invest in innovation through a crisis outperform peers during recovery by up to 30%. The presence of early-stage funds in your cap table can therefore enhance the reputation of your business for being innovative and growth-orientated.
The reassurance that an early-stage fund provides means that other investors perceive less risk. This works to the advantage of the founder when negotiating funding rounds. It may also help to limit the dilution of the founder’s equity share when onboarding new investors. Another benefit of early-stage funds in a cap table is that the founder is not necessarily obliged to repay the investment if the business fails, unlike a bank loan. Early-stage funds shoulder the investment risk because they believe in the startup’s future success.
Onboarding Early-Stage Funds
Many VC and other early-stage funds require representation on the company board to ensure close involvement in strategic decisions about the startup’s direction. In order to avoid conflict at the board level, therefore, it is important for founders to choose an early-stage fund that is a good match for their business objectives.
In order to obtain the right kind of early-stage funding for your cap table, it makes sense to develop relationships with multistage investors before the official fund-raising process begins. PitchDrive actively pre-vets startups so that their business angels don’t have to. By the same token, founders should also vet potential investors in order to find the right fit. This includes checking out the fund’s investment mandate, if they have one, so as to improve the chances of getting a positive response. Personal chemistry is also a factor in choosing an early-stage fund or a business angel. This helps ensure that everyone’s values and priorities are aligned.
The presence of an early-stage fund in your cap table increases your access to capital and enhances investor confidence. This raises the likelihood of larger and more successful funding rounds. In some cases, early-stage funds may provide founders with avenues to more fundraising opportunities through their network. In exchange for losing a degree of control over their business, founders receive the gift of growth.
If you’re seeking funding, guidance and support for your early-stage start-up, get in touch with the Pitchdrive team today to get started.