I am extremely proud of all the entrepreneurs in the region that are making a difference with their technology startups, or ‘tech startups’. You are making a difference by making our lives simpler with technology, and you have provided jobs for others and yourself. We are very proud of that community that you have created. Here are a few repeated questions that I receive from my tech startup clients.
Question: What are my best options for raising money a tech startup?
Fajer: The are many options for raising funds for a small businesses. Here is a few of the popular ones, including the pros and cons for each:
- Seed: Just like a plant, it is the beginning of the life of the startup. This is usually provided by family and friends. Its advantage is that it is very easy to access, and can come from a very supportive environment. Its disadvantage is that it usually is not structured properly and legally. We are more likely to give a family member a large amount of our company without thinking through the valuation of the company.
- Crowdfunding: A product or a service is offered in return for money. Technically, you are selling a product or a service before you launch that product or service. Its advantage is that it can be a great marketing tool, while its disadvantage is that there is no legal structure for crowdfunding in Kuwait.
- IPOs – Initial Public Offering: You can offer shares of the company to the public.
Its advantage is that no one controls shareholder, and capital is raised quickly. Meanwhile, the disadvantage is that the legal structure in Kuwait for public shareholding companies is not efficient for small companies.
- Angel Investment: It is when a person or a small group of people invest with their own money in a startup. This usually happens at the early also. The advantage is that it can be a very supportive and mentoring relationship, while the disadvantage is that just like at seed level, they will ask for a large amount of shares.
- Venture Capitalist Firms: Those are professional investors that invest in startups. The advantage is that they add a lot of value to the company as they are usually reputable companies. On the other hand, the disadvantage is that the deal takes months to complete, and the VC firms may have many conditions in order to invest.
Question: What should I keep in mind before approaching investors?
Fajer: There are a number of things to keep in mind before approaching investors, which include:
- Know your options: Consider all the options mentioned above and understand that you can work with more than one, or be open to more than one option.
- Know what you will do with the money: It is important for investors to know where the funds are going and how will the funds help the company expand.
- Know when to ask: Something that you would need to consider is the timing. Timing is vital. Usually, investors want to provide funds in the first few years of a startup because the potential for growth is much larger than an already well-established company and therefore the returns are much larger.
- Have a solid legal structure: Investors would not want to invest in companies unless they know what the structure of the company is and that includes all the shareholders, the type of shares they have and their rights.
- Register your intellectual property rights: This is very important. Make sure you have trademarked your logo, and if you have an innovation then you have patented that innovation, copyright any designs, that you own all the websites you are using and so on. A mistake that startups do all the time is thinking that they need to copyright their source code; you do not need to do that. Do not give it to anyone and make sure no one has access to it.
- Know what the investor will be wanting: Know how your investor is expecting their returns, this will help you negotiate.
- Prepare for Due Diligence: Usually, investors will ask for Due Diligence. Due Diligence is an investigation where the investor digs really deep into the company to see if it is worth investing in; this will be from an accounting side and a legal side. Lawyers that are conducting due diligence will usually look for red flags such as any cases against the company, any debts or legal obligations on the company, any contracts signed that might put the company at risk in the future, etc.
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By Attorney Fajer Ahmad