The ABCs of funding for entrepreneurs

Singapore gaming and e-commerce company, Sea, may not be a familiar name to most, but many would have purchased something from its popular site Shopee. This is a five-year old start-up that is thriving on the e-commerce boom in Southeast Asia, according to the Economic Development Board.

In September, Reuters reported that the company raised US$6 billion in an equity and convertible bond sale which was considered the largest in Southeast Asia. Sea said the cash will be used for strategic investments and potential acquisitions. It is also its second major fundraise in a year, having previously raised US$2.6 billion in December 2020.

All start-ups will have to raise capital

Cash flow is crucial to every start-up, especially in the early stages of your development. Without funding, the majority of start-ups will not survive. And in Sea’s case, having a cash pile creates competitive advantage. The company is planning to expand beyond Southeast Asia and to replicate Shopee’s success in Latin America, Europe, and India.

Having a war chest also helps you hire key staff, invest in marketing and sales, and acquire companies.
Fundraising however, is the toughest part of running your own business. Here’s how you can get started:

Begin with the basics – gain understanding

It starts with knowledge of how capital markets work. Broadly, there are public markets and private markets.

In public markets, there are two main categories – equity and debt. When a company lists on a stock exchange, they’re inviting public investors to buy shares in their company[1] . Going public however, comes with a new level of scrutiny including earnings expectations, disclosure of financial statements, and compliance requirements.

An alternative is to tap on the debt market where an entrepreneur borrows money from an investor or venture capital (VC) firm against an interest rate for a given period. This is becoming a popular option among start-ups, with Netflix, Tesla and Uber taking this approach. It is also a growing trend in Asia – DBS and Temasek Holdings jointly launched a US$500 million debt financing platform for growth stage technology-enabled companies.

Private markets play a crucial role in helping start-ups access funding. According to PitchBook, a venture capital or private equity firm starts a fund and raises a pool of capital, which is used to invest in promising private companies.

Link to article 12: taking your company public

The ABCs of funding

In private markets, start-ups go through various funding rounds, starting with the seed round. This is usually from the founder or his or her family and friends, and this is the capital used to start the company. At this stage the company has yet to prove itself, so the investment is considered fairly risky. It is based on a pitch and an aspiration.

The next round is Series A funding, which is considered a crucial time for a start-up, as it’s ready to scale.

Subsequent rounds are then labelled Series B, C and so forth, with each round corresponding to a different stage of the company. In each funding round, money is exchanged for equity, and investors expect a return on their investment.

On the other side of the investment are potential investors – these could be angel investors or venture capitalists. Angel investors are individuals who invest money into start-ups and back aspiring founders, while venture capitalists work for a larger VC firm and typically have guidelines on which companies to invest in as well as boards that vote on whether or not to back a particular company.

What you need to know about equity

Equity is one of the crucial decisions you will make as a founder – this is the decision rights and control of your company. When you’re raising capital, you will need to understand dilution and how it impacts you. After each round of fundraising, you lose some equity to investors, but the value of your stake also increases.

Having a heavyweight investor adds to the credibility of the start-up and helps generate positive publicity. In such instances, there is a dilution of the founder’s shares, but the diluted holding value is worth a lot more.

So how can you raise capital without giving up equity value? At each fundraising stage, sell enough equity at the highest possible valuation. The goal is to build value over time, therefore preserving your total equity value or even enhancing it as the company’s value grows.

There isn’t a magic number, but most people like to see that the founder or founders still hold 60 to 70 percent of equity when a company decides to take the initial public offering (IPO) route. For unicorns, the founders’ stake at IPO can be lower but he or she must still have control over the listed company.

Remember that too much capital is not necessarily a good thing. Progression is key – at each stage, focus on raising the capital that you need and maximising your value.

To find out more about accessing global capital and transforming your business into a world-class company, sign up for GEX’s Academy’s “How to Develop Strategies and Scale Your Business 201” – a course developed by Former Member of Parliament Professor Dr. Inderjit Singh, a serial entrepreneur.