Funding Strategies

The California Model of Capital Raising

Various research studies put the number of such SME businesses at between 14,000 and 25,000. Complementary research also indicates that around 50% of these are seeking more than $100,000. Key research also indicates that the major problem facing emerging growth businesses occurs when capital needs to be raised in the region of $500,000 to $2,000,000.

The U.S. experience over the past 20 years indicates that equity needs to be raised in stages. This is often referred to as “The California Model”. Very few U.S. venture capital-backed companies have been successful at raising a large amount of funding in a single round. Even so-called multi-million dollar commitments by Venture Capital firms are usually structured in stages or “tranches”.

These tranches are set against predetermined milestones. Unless the milestones are achieved, the ongoing tranches are cancelled or re-negotiated.

Venture Capital Investments (even IIF investments) can take a long time to achieve. Despite these investments being directed only at the ‘brightest of the shining stars’, it often takes over 12 months from first contact with the VC until the first cheque is available. Even so, the first cheque is often no larger than $500,000.

The market is still immature with regard to “informal venture capital” (private equity). The ability to bring together 10 to 20 people in a syndicated first round investment of (say) $2,000,000 remains difficult. Therefore, we, in Australia, can learn from the US experience and utilise staging in order to achieve worthwhile investment outcomes. This is what is normal in the U.S. - this is what we also like to accomplish with our client companies seeking investors and venture capital.

An Example of a Smaller Scale Capital Raising Schedule that adopts the California Model is shown below!

Below is an example of what a company might expect to achieve on a smaller scale, leading up to a prospective listing on a secondary exchange, or in preparation for a potential buy out or trade sale to a larger company; yet still leaving room for some additional dilution if a primary stock exchange listing is required further down the track.

As you can see, what we have achieved here, is a majority share holding for the founder's all the way through the process and also great leverage for investors, and in particular, the early bird investors. In fact, seed capital investors could be looking at gains of as high as 1,900 % and the founder's have created a possible share holding, capitalised at $1.00 per share. So if the founder's share holding represented 18,000,000 shares in this example, then the founder's might, after 2-3 years, have established a possible $18,000,000 share holding?

(These figures are provided for educational purposes only)

It should also be noted that your business may not require to travel this far. You may choose to keep your business ultimately as an un-listed entity. The above table is an example only and may not apply to your business model and capital requirements.

The most important thing to remember is that we need to offer value for money to investors at each level and in doing so, we need to establish an ultimate exit strategy for the founders and the investors alike.

We can help you come up with a plan that is suitable for your particular situation.