Today’s private investments fuel tomorrow’s changemakers
The world of direct investments into private companies is vast and full of potential for ventures seeking capital
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Starting a new business venture can be incredibly rewarding. It can also be very difficult. On average, 90% of global start-ups fail.1 Among the many challenges founders face—product-market fit, finding talent and mentors, and sustaining growth, to name a few—raising capital is consistently one of the most taxing.
Despite the hurdles in securing capital, the private market is fertile.The global venture capital space allocated USD 300.5 billion in 2020, the second-highest year on record.2 Increasingly, ultra-high net worth individuals (UHNWI) and wealthy families are also exploring direct investments in private companies. More than three-quarters of family offices allocate capital to private investments today. Some of them even take the role of traditional venture capital firms, assuming the role of the lead investor in major financing rounds, taking board seats, and exerting active influence on the company’s strategy. Others are more passive financial investors that are fine not being in the driver’s seat.
The best time to raise capital is when you can — not simply when you need to
Depending on the investor, securing private funding can bring much more than an infusion of capital. The right investors can also provide strategic advice and open doors to other investors or potential clients or business partners—or add expertise in marketing, talent recruitment, and product design, to name a few. But there’s a difference between simply finding investors and finding the right investors for a specific venture.
Key challenges for ventures
Even the most promising start-ups have difficulty raising private capital. Competition is fierce, and investable capital is limited. Moreover, several aspects of the fundraising process are completely out of companies’ control, such as troughs and peaks in specific sectors or in the broader global economy.
Unfortunately, the time the management spends on fundraising is time they don’t spend on the business. In fact, companies often spend months building relationships with investors to prove that their product, team, vision, and growth strategy merit investment. To get a foot in the door, founders must offer a sound investment rationale and a compelling vision from the start.
Investors are inundated with pitches and meeting requests from start-up founders. Their time and attention are limited, and it can be difficult for companies to cut through the noise. The good news is that with the right network to open doors to the right investors, the likelihood of finding the best partners to help execute the vision of the venture is much more achievable. Once a company successfully starts the discussion with an investor, another obstacle needs to be overcome.
Investors rely on their experience and successful track records when allocating capital. This means that securing an investment can be especially difficult for ambitious start-ups aiming to carve out an unestablished market with no prior precedent.
Getting the timing right
Tomer Tzach, CEO of CropX, an innovative start-up focused on boosting crop yields by saving water and energy, notes that “timing is key to fundraising, and each funding round is different.”
CropX’s mission is to revolutionize and automate the agricultural decision-making process by combining above-ground data sets with real-time soil data measured by proprietary soil sensors. Since its founding in 2015, the company has acquired three companies, made several strategic partnerships, and emerged as a leader in AgriTech and digital farming innovation.
To win over investors, companies must clearly define their selling points and key accomplishments
Tzach credits his company’s success in fundraising and beyond to tactical decision making. He explained that the optimal time to raise capital is after a company has realized significant milestones that can fuel momentum and offer proof points for a successful investment narrative.
While active fundraising takes precious time away from the day-to-day operations of running a business, it is a necessity as a way to ensure consistent liquidity and resources to execute long-term growth strategies. “The best time to raise capital is when you can—not simply when you need to,” Tzach added.
Tomer also underscored the importance of understanding the investor perspective. He noted that when meeting with investors, founders would do well to highlight the most salient points of their company that are relevant to the particular investment criteria and expertise of the individual investor(s). Start-ups must be prepared with a succinct, convincing investment rationale that singles out the most important and unique aspects of their narrative—including the vision and impact of their product, key financial data and financial projections, research on competitors, product-market fit and market opportunity, and core members of their team.
Communicating a vision to win confidence
It has often been said that venture capital is more of an art than a science, particularly with early-stage investments. Late-stage companies bring years of financial data and a track record of successes. Investors in early-stage companies must often rely on their intuition as much as they consider the company’s business model, early achievements, and especially the quality and track record of the management team.
Crafting a powerful narrative around the business and its pioneering potential can bolster enthusiasm and cultivate chemistry with investors, says Tzach. “To win over investors, companies must clearly define their selling points and key accomplishments. This includes giving investors transparently a genuine feel for their company, the team they’ve built, and the culture they’ve fostered to position themselves for success.”
The importance of forums for connection
The world of direct investments into private companies is vast and full of potential for ventures seeking capital. Investors in turn also face many challenges when pursuing direct investments . It requires an informed perspective, a sound strategy, and a strong network of experts to realize the best outcomes.
At Credit Suisse, we are firm believers in the power of connecting the right people with the right ventures to power innovation. That’s why we launched the Private Innovation Circle in 2014. to explore the ideas of pioneering ventures from around the world.
This article was sponsored by Credit Suisse
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Sources:
1. NanoGlobals, “Is It True That 90% of Startups Fail?” 2021. Online edition.
2. KPMG, “KPMG Private Enterprise Venture Pulse Report.” 2020. Q4 2020 edition.
