When it comes to raising capital for your company, every stage of a company’s development calls out for a different level and type of capital raise, and the differences are crucial. Many assume that the JOBS Act obliterated divisions between what channels of investment might be open at a given time at each stage of growth. Not exactly… More options exist now, but each has its place in a company’s growth cycle.
What follows is a guide to some of your options:
Seed Stage: You’re looking for a million dollars or less, simply to prove the product, business service, or concept with a prototype. Investors will (justifiably) see this as risky, so it can be difficult, or have a very high cost of capital, to raise even this relatively small amount. Traditionally, funding comes from the entrepreneur herself, or friends and family. Your previous successes, if any, could help make the case to an “angel” or venture capitalist (“VC”), but the risk is still considerable. IF a VC or angel has interest in you, they typically are going to look to hedge risk with a convertible note or preferred equity that can be highly dilutive of the company–meaning costing a greater percentage of the company–add prioritize getting their money out first.
The JOBS Act, however, now permits seed stage companies to reach out to the public at large for very small sums of money for much less dilution. They also might not be motivated by just financial reward – like brand loyalty, a cause, love of innovation, etc. But this isn’t Reg A, this is Crowdfunding, or Regulation CF. Reg A is too burdensome for the amounts that can be raised in CF – just over $1MM.
First Stage/Series A: Here is the first formal round of capital raising. The product is in front of a small group of customers and prospects. This stage and the next are perhaps the most challenging junctures of fundraising since amounts required go up, but risk can still be relatively high. Typical amounts sought are 3 to 5 million dollars. Wealthy individuals (called “accredited investors”) offer money because they love the idea, and see it headed in a good direction, so they want to buy in early for value. This is also a typical buy-in phase for the VC’s, as they can also help with money but with introductions to prospective customers, employees, and B2B partners.
This stage has traditionally been executed as private placements under Regulation D to individuals and groups who qualify as accredited investors. It typically still is, but, now under the JOBS Act you can use general solicitation to reach out to a much larger group of accredited investors to increase chances of funding your deal – portals, advertising, etc.
Typically, still too early for Reg A, but not always is Series B.
Second Stage/Series B: Now we’re growing. We’re focused on revenue and scale, or, in the case of technology, perfecting it, now that it has passed critical stages of proof. We’re typically looking for 5 to 25 million dollars. Now is the time to look at Reg A, which allows you to raise as much as $50 million a year from the public at large in a streamlined SEC procedure that sidesteps the many rules surrounding IPOs. The process is regulated by the SEC, but, like crowdfunding, relatively small amounts can be raised from a much larger group of people for a lower cost of capital and less loss of control. Further, there is a manageable reporting regime for Reg A, which can help boost the issuer’s profile. It’s increasingly growing in popularity for capital raising at this phase.
Third State/Series C: Now is time for the biggest raise that allows liquidity to the investors, through an IPO. BUT Reg A can also be a less expensive option to the traditional “IPO”. The issuer can raise follow-on rounds in Reg A and list them subsequently on an exchange. This also be the stage at which you look for a larger acquirer or merger partner, with which to build on synergies. Reg A is an excellent tool to keep fueling growth and building value in the company while looking for such an entity.
In short, the architecture of raising capital has changed somewhat, with new tools to help the entrepreneur and his or her investors get the job done. Good counsel can get you through this process in good shape to start, build, grow, and sell your company or investment target, and to take advantage of every element of the rules that can help you. It may be time to throw your hat in the ring.
Contact us for assistance with corporate capital raising and other transactional matters.