There are common myths regarding Australian SME capital raising.  For entrepreneurs these myths are, at best limiting, but commonly destructive.

• It is all about who you know.
• Success is 90% about doing magical investor and elevator pitches.
• If you don’t get investors within 4 weeks, you never will.
• Most capital raising fails because there are so few investors.
• Investors have most of the power in setting the terms and conditions.

Like most myths they stem from some kernel of truth, but the problem is the oversimplification of this truth and inappropriately applying the simplified version to all possible circumstances.  Let’s break these myths down for you.

Who you know.

Of course, who you know and have access to matters and having excellent relationships with the right people is often going to give you an advantage.

But there is tremendous difference between an advantage and a sure thing.  For example, all but the dimmest or most blindly supportive potential investors are going to understand, even intuitively, when investment fundamentals are just not present in an offering.  Equally, there are at least as many examples of people gaining investment without any useful network connections.

Investor & Elevator Pitches

Both are quite often extremely important and in tough competition they may encourage potential investors to give your offer a better look, but they are almost never the determinant when making an investment.  What they do make for is good optics and TV and therefore a concise aspect of the process that people can identify and focus on.

Doing them badly may weaken your case, and if your case was already weak it may be fatal.  If your proposal was obviously strong and your poor elevator pitch stopped an investor, they probably weren’t a good investment partner you would want to work with anyway.

4 Weeks to Nail the investment.

It is hard to find much truth in this one because it just doesn’t stack up in most real circumstances.  To start with most investment forums and investor meetings will normally take weeks to organise and quite often it is a strategy of progressing from one forum or group to the next, and so on.

Then when potential investors have some interest, they will go slow in their deliberations and due diligence because they want to consider all factors possible, and this takes time.

When you consider that the average successful equity funding round will take 9 months, it should stop this myth in its tracks.

Too Few Investors

It is true that Australian SME equity investments exist in such a regulatory environment that does not require and is not conducive to any centralised data collection of either investments or investors.  This difference to the centralised publicly listed equity raises via stock exchanges is significant because the centralised nature of exchange equity raising or the equity capital raising by exchange listed companies enables the collection of data about those investments and investors.

Private investors into SME equity offers seldom disclose much detail about themselves and their investment activities.  Actually, if you do a search on LinkedIn for “angel investors” you will find that most of the people that list themselves as angel investors have a very small and limited angel investment portfolio, if any at all.  It seems to often be a wannabe claim in many instances.  All but the most brazen of significant “angel investors” seek to shun any attention and limelight.

Thus, it can be difficult to identify individuals as potential investors, but that is not any confirmation that few exist.  There has been a growing number of investor networks, some very dubious but some excellent in their methodology and intent.

It is always useful to remember that investors want to invest, it is what they do.  But they only want to invest into the right thing for them.

Investors Set the Terms

This myth ties back into the belief that there are too few investors, thus the fear is that although the equity offeror is seeking one set of investment terms and conditions the scarcity of investors gives those few investors all the power in negotiations.

By understanding that there are not too few potential investors, and that it will take a lot of hard work and time to find the right investors, the fear of scarcity can be alleviated. 

Offering an equity investment opportunity does create an occasion of negotiation; an offer then either acceptance, a counter-offer, or declined offer, etc, etc.  If it is a negotiation the equity offeror may, in turn, accept, counter, or decline and counteroffer made to them.

Feeding the Myths

Where so many equity offerors misstep is that they:

• Don’t plan their capital needs adequately in advance;
• Don’t prepare their equity offer properly;
• Don’t set an equity raising strategy;
• Don’t dedicate enough financial, time and other resources to the equity raising; and
• Are impatient with the process and gaining a successful outcome.

In summary, many equity offers are made when the offeror is desperate and the offering is poorly structured, organised and executed.  With this combination an equity offer is almost doomed to failure, regardless of there being a good underlying proposal.

Regrettably, the offeror may never understand what the real cause of their offer failure has been, and instead will feed into the SME equity raising myths. When you consider that as much as 50% of SME equity finance offers fail, largely for these very reasons, little wonder these myths have taken a firm hold and become self-fulfilling.

Avoid the Myths, avoid failure!

At the risk of oversimplifying a complex task with many variables, it is relatively easy to avoid the myths of equity raising failure by:

1. Planning capital needs adequately and well in advance;
2. Properly preparing an equity offer;
3. Setting a realistic equity capital raising strategy;
4. Allocating adequate resources, including time and money to the equity capital raising; and
5. Be patient with the process and stick to your strategy.

In equity capital raising, as in with most things, don’t enter negotiations when you are desperate.