Are You Ready to Raise? The Ultimate Capital Readiness Checklist

Before you launch your capital raise, ask yourself: are you truly ready? In this essential episode, Martin and Brendan break down the five critical factors that determine fundraising readiness. We dive deep into capital requirements (expect $100-200K in upfront costs), validation strategies including "testing the waters" campaigns, and how to assess your offer strength using VirtualAd's Capital Conversion Framework. Learn about the importance of community readiness, brand awareness, and why having a tangible product beats just having an idea. We share real examples from client raises, discuss the difference between Reg CF and Reg D approaches, and provide actionable advice on cash flow planning during those crucial first 3-6 months. This episode is your roadmap to determine if you're ready to commit to a serious online capital raising campaign.

Transcript

0:02

Okay. Welcome everybody back to another exciting episode of Behind the Rays. We're joining you here from probably the most intense winter week we've had in Canada this year. With like probably close to a meter of snow falling in Toronto and Ottawa.-25 today. So we're hunkered down and we're ready to talk capital. One of the topics. Well, the topic for you today is about are you ready to raise. So as we talk with a lot of issuers, one of the main questions and topics on their mind is when is the right time to start a capital raise. And there's a ton of factors that go into this. So we wanted to spend some time exploring it with you all today. The truth is, like most things in life, there's never a perfect moment, but there is always a moment where you have to decide to move forward. A couple of the key considerations that we'll be discussing with everyone today is capital readiness. So knowing the upfront costs to a raise, validating interest, assessing your offer strength, knowing your community readiness and the brand awareness around your company. And then some pieces of some final advice, as always, branding. You ready to do this? Yep. Ready to do it? Yeah. We've been talking with a wide variety of issuers this week, so I think we've answered these questions a lot. Let's get into the capital readiness side of things. One of the most important factors is going to be how much money do you need to start. And from our perspective we usually talk about honestly, sometimes the upfront cost being up to 100 K, 150 K. In some instances, if you're going really big, could be 200 K, so it's not the cheapest to get started. And if you want a little bit of insight into what's behind those costs, maybe Brendan, you could get us started with what do you see as one of the main costs to get started? And I can also add some flavor on top of that. I mean, there's some upfront costs just from a regulatory standpoint. So you obviously need to engage your counsel to get sort of your SEC filings or your offering exemption in place. And so there's some legal work associated with that and getting those approvals. And, you know, if you're working with a broker dealer, there's oftentimes implementation fees for that relationship as well. So those are two of the larger costs associated with getting, a fund ready to raise. And then you're doing the raise via online marketing or engaging an agency partner. You know, there's oftentimes some set up fees associated with getting the marketing funnel in place and getting your ads launched. Yeah, a lot of the cost categories come from compliance. So on the compliance side, you're gonna have to get some legal work done. You'll have to engage a broker dealer for regs, CFCs. There's basically two types as well. So if you're looking to raise under 1.2 million, you don't need audited financials. You just need reviewed financials for above 1.2 mil. You actually need audited third party financials. And you can raise more. But each one of these adds a layer of, of cost to the raise. And, depending on your investor platform, as well. So there might be, like Brendan mentioned, different upfront costs too, that, you know, you look at your marketing spend. So ironically, as you look at this in your company, probably wanting to to get into the market there, come to some pretty significant trade offs, I would say, in terms of choosing priorities for whether you move forward or not. So one low cost option, I guess we should mention is that there is a red deer, which is quicker and easier to spin up. So, you know, red CF might be the natural choice because it's a bit of a lower investment value. So you're looking at like a long tail of investors investing 500,000 bucks. So you're like, okay, there's gonna be a ton of those, Greg. These are largely accredited investors. But ironically, it's actually cheaper to spin up, a rig d than a than a rig CF we should let's throw out some totals out there and see. I want to, you know, maybe throw some totals in terms of compliance and platform startup costs and then talk a little bit about the marketing planning and the cash flow planning on that for issuers as well. So I'd say add a ballpark figure for compliance if we're talking about legal and finance and then platform fees, I find that total usually coming up to about 50 K, depending on whether you're getting audited financials, it might be slightly more. But let's talk a little bit about the marketing side. I think that's what we know best. And I was thinking we could talk a little bit about some insight on the cash flow side and how to plan for that. So let's say, you know, you're an issuer, you're all in. You've covered your admin and your startup class. Brendan, how do you help? The clients you talked with to understand basically like the first, you know, 1 to 3 months of marketing costs and the process of how that gets recovered and how to work through that. That's a great question. You know, it's important to forecast the expected cash in or money raised, you know, based on historical metrics. So it's important for us to kind of look at what we've been able to achieve in the past for like minded businesses or funds raising a similar amount of capital in a similar amount of time, and then use some of the metrics that we're confident in. And some of those metrics can be, you know, obviously your ads budget, you know, if it's a red day and you're taking meetings with accredited investors, expected cost per meeting. What's your expected attendance rate for the meeting? What's your expected average investment amount? You know, that kind of gives you your forecast model in terms of how much cash in you can expect. And so it's important to kind of nail down some of those metrics and create a plan, so that you can, you know, understand how much marketing budget you need to generate, how many meetings to generate, how many closed investors, and in turn, how much capital you're raising. From a marketing cost standpoint, our approach is very, it's more of a scaled approach. So you asked about the question about the first couple months. Martin, you know, really what we want to do is be a lot more conservative in terms of our marketing budget during the first few months to, you know, validate and optimize and get proof of concept. But the marketing approach that we're taking, you know, there's lots of moving pieces. So we need to, you know, nail down the ad messaging, nail down the landing page, copy and design, nail down the email automations, and look at all the metrics and silo and optimize those components till we have a really efficient, you know, funnel. You know, until we get to that point, we don't want to spend too, too much upfront. We kind of take a three phased approach. So the first phase is, you know, setup and validation. And so we're spending the smallest amount of our marketing budget during that phase. Then once we've validated the funnel and it's working from an economic standpoint, then the second phase is to launch new ideas like new tactics. So look at webinars, events, publisher promotions, things like that. We're in market with all of these different strategies that we kind of scale up our advertising budget in the third phase. So it really depends on the amount that you're trying to raise, because everything is a function of how much you're trying to raise. So if you're trying to raise 50 million, you're going to need a larger, ad budget. If you're trying to raise 2.5 million, you're going to need a much smaller ad budget. I find that the the first three months kind of are the most critical from a cash flow perspective, because I think a lot of the issuers that we work with, they're we're starting from scratch with a lot of them. They might have a really successful business, or maybe they've been in real estate for like 20 or 30 years, but they're, a company of 4 to 5 people that has raised millions of dollars for real estate projects, but they've never really done any marketing for them. It's interesting because they are starting from an area of lots of experience, but very little brand awareness or exposure. And so I find in those cases that first 1 to 3 months is very critical. And we're always trying to balance. You need enough cash to be able to do the proper testing. And then you also need to be able to have enough cash that when you're starting to get to that break even stage, which I would say we you largely target around that 3 to 4 month period. Is that you want that to be significant enough to start recovering some of your, your overall costs, that I find that the most difficult period, I guess, from an issuer perspective, because they might have already, you know, paid, like we're saying, like from a compliance perspective, maybe 50 grand, 60 grand, putting another 60 grand into marketing spend. So, you know, you're already 100 K into it. At this point. I find that that's sort of the most white knuckle period. I guess for an issuer, you have to stay the course and make it through it. So I'm not sure if you have anything to add to that or just, you know, we've we've experienced that, frequently. But, I don't know if you have any like, insights in terms of, you know, how to get through that or experiences from from working through that with some clients. It kind of just goes back to validating in optimizing the final during those first few months. So I think the way to get through it is to not overspend on marketing and not overspend on the ads and just really work on, you know, tweaking and refining the investor acquisition process. You can get to that breakeven or positive free cash flow point relatively quickly, but it's just important to not come out of the gates too hot with your with your ad spend. There's no point in having an equal distribution of ad spend throughout the duration of the raise. It's just better to kind of ramp it up as you're seeing the proof of concept. I thought that one of the conversations we had with our most recent client is pretty experience in the DTC space. When we did our budget planning with them, we had a really unique approach. It was actually a little bit aggressive, but I liked how it made sense because it was starting out of the gate, like you said, not too hot, but the perspective was, let's just try to get two one times, return on ad, spend as quickly as possible, and then continue scaling between 1 to 2. And their goal is to eventually actually get to a really high level at a two Roas, because the volume becomes so much more significant after that. So it's almost like what they're kind of losing in efficiency, they're making up for in volume. And they are also keeping in mind the need to be at a very high level at the end of the day is where there's the most urgency. So it was like there was that balance there, but we were already looking at, okay, like, we've got to be at this large amount by the end of the race. So we got to kind of like start to scale up relatively, you know, like you said, take your time at the beginning, but there's that goal to get there by the end. Exactly. I think to with that client or certain clients is and there's a pretty short fundraising window like time window. That raise is very short and it's closing, you know, in a couple months. So I think they're willing to kind of sacrifice a little bit on the cost efficiencies in return for volume of investors getting going really quickly. But then for maybe like a longer raise, then we have the luxury of being more conservative, like we have more time so we can start slower and gives a little bit more breathing room. But yeah, I like their approach too. And it's and it's almost like a week by week analysis. So since it's a daughter raised window, we're literally looking at like the budget scaling like week to week as opposed to month to month. I feel like the the regs, you have to just go by so quickly because a lot of them, like the goal is to get done in 6 to 8 months, and it just goes by so quickly. When you think of just the launch and then you're almost planning for the end, like when you're three months in, it's kind of crazy. One of the points I wanted to touch on, which you've been sort of chipping away at a little bit, we've been thinking a lot about is how to validate as well. So there's a lot of issuers that are out there that are maybe seeing success raising funds from their network, friends and family. Maybe they've even hit like a million, 3 million, just like through the sheer willpower and their network and their ability to connect. But they haven't really sort of tried this DTC approach, and it's a lot different getting into the market with, you know, somebody that doesn't even know you and you're showing ads. And I know you've had a couple conversations about validating interest. So I was curious maybe if you could share some of those, some of those ideas with people. I think that's important to ask yourself, or to put yourself in the investor shoes and ask yourself, what would you invest in? There's a lot of different conversations that we're having with people, and there's a lot of ideas that people have versus actual businesses or actual proof of concept or historical success. And so if you're an investor and someone comes to you with a great idea, is that enough to want to actually put your money into, or would you prefer something that, you know, made it a little bit further? And when it comes to like the product development, customer growth and the, you know, product market fit and things like that. And so I think when it comes to getting started and validating, there's different ways to validate your fund or your offer. I would say before we kind of get to that, you want to get some proof of concept with your business before investing in online fundraising campaign. Have a product or service, that you've actually developed. You're catering to a problem or a gap in the market. And if it's on the consumer side, if you have a product, well, you have videos and images and you've got content that actually showcases in action. There's other things like, you know, social proof. So maybe customer testimonials, the economics of your offering need to be good. So what's the total addressable market? Is there a lot of growth potential? Do you have a unique value proposition for what you're offering that is different than other competitors in the marketplace? So it's just kind of like the checklist of starting a business, right? You want to have all of the pieces in place to be successful. That can then be conveyed from a marketing standpoint to potential investors. So I'd say first, you kind of want to go down this path. Once you've made some progress with your actual business, or maybe you've got some validation where customers or growth trends are ready, because that's what investors are going to want to see. Then when it comes to actually like validating capital raise campaign, there's different things that can be done. You already mentioned Martin. You can do a red deer, for instance, which is a little bit lower on the startup cost. So you could get a rec D 5 or 6 C offering exemption in place relatively quickly. And then you can test the market by running some ad campaigns and booking some meetings with people and getting some feedback and trying to close some investors. Or if you're doing a red A or a Reg CF, you can do what's called a testing the waters campaign, which is not investment solicitation, but it's more kind of surveying or getting feedback on gauging interest on if someone would be willing to invest in what you have to offer. That's a lower cost initiative, because you don't have to spend so much money on ads to test the waters and get some people to fill out a survey and share their feedback. And if the results of that are positive and people think really highly of what you have to offer, then that's the proof of concept and validation. You need to take it to the next step and invest in larger, maybe legal fees to kind of get everything in market, sign those broker dealer contracts, and actually invest in a larger scale marketing campaign. Yeah, like the testing the waters because it can be used a couple of different ways. And if you're, you know, truly just trying to gauge interest, you don't actually need to even, submit any compliance documents. You can just sort of be like, okay, we're literally testing the waters, and we want to see if there's some interest in you that can be as simple as just a landing page. Like if you wanted to keep the super, super simple. So literally the start up in Ads Manager, you have a landing page and then you're collecting emails in a spreadsheet. And then obviously you can make it a little bit more robust if you're looking to build out your infrastructure ahead of time. And what's neat about that is that you can, depending on the information you want to collect, you can also start to engage with that audience to understand, you know, what made them interested. What's also kind of neat, too, about the PT is that I think also, if you're committed to a raise, you can also use it as a bit of a teaser and starting to build hype, and almost like making it a little bit like a secret launch is happening. And you can also set up some perks if people show interest ahead of time. Sometimes I feel like the downside to PT is that it's such a big step from somebody being like, hey, I'm interested to being like, make the conversion from PT W to like literally pulling out your wallet is so different because it's natural for people to just pick, oh yeah, like this sounds interesting, but I feel like it's a bigger step to be like, oh, now I got to invest 50,000 or $1500. So I find that can sometimes be a bigger step to make for people afterwards. Yeah, it can almost be seen as like a pre-launch, a warming campaign in a sense. And you're also building a data base, which is good that you can leverage those opportunities once you actually go live. And yeah, there's different strategies to convert those users into investors after the fact, for sure. I like what you were saying, though about the Reg D, like splitting that up to to really do like a validation test, I almost feel like that's the best one, because if you can get one, you know, set up relatively cheap and you do the 506 C, which allows you to do the solicitation, you actually are going to talk to investors and get to know what they think, especially accredited investors, because that's the kind of the gold line in a way, is like, yeah, if you're doing a rec CF, you actually want both accredited investors, even if they're investing like 1500, it's like you actually do want those types of investors investing in your ex. One is if you're doing a future CF or you're doing future equity, these are just great ways to validate because the remedy is you're going to set up calls with people, someone you'll see like, what's the actual interest? What type of people are setting up these calls. And I'd say if you can't close accredited investor for what you are hoping to be a future reg CF, like, that's not a great sign. I don't think share getting to the point where you're actually having meetings and conversations with accredited investors. They're not buying into what you're offering. That's a sign that it might be, you know, even more challenging to communicate in a more transactional manner where you're now not actually even having meetings with people you're just expecting them to invest off of the marketing material or the landing page or the video. And so I think the rec days are a great place to start, and you'll have a lot of conversations with people. There's going to be so many learnings from that. Or you'll likely encounter some larger investment opportunities than you might find in a crowd fund. Yeah, exactly. They might give you that initial funding that you need to do. Reg CF, you might even just be able to cover the project costs eventually. I like what you're saying also on the offer side. So I think this is a really interesting perspective that some issuers don't think about. This is the idea that I have and they're not really thinking about it from the investor perspective. Like you said, the putting yourself in the shoes of the investor is important. And we have this framework that we use called the Virtual AD Capital Conversion Framework. We encourage issuers to look at a broader mission. So having a mission is important. Also like what problem are you solving. And that is important for the offer. Framing is like you need to be solving some sort of problem for either people or for investors addressing a large addressable market, having an elegant solution, showing leadership in a particular category. Social proof is important. So actually having people that's buying into the idea, showing momentum either pre raise or during the raise is really key. And then obviously the last part is just having a compelling call to action. So we'll probably get into that capital conversion framework in future episodes. Just wanted to kind of drop that as a bit of a teaser, and that helps with our framing maybe rendered. Last point before we sign off would be there's an element of community readiness. And also in the event you don't have a community, I'd say brand awareness. How do you help founders understand the level of like brand awareness that they would need to start up a capital raise? And some like key points on how to get started with that. I mean, obviously brand awareness and brand affinity is important when you have what's called social proof or other entities or individuals or investors advocating for your brand, your product, your offering that goes a long way, especially to someone that doesn't know who you are. More early stage. Maybe there's not a lot of historical metrics or results that you can kind of reach. Having a community to kind of back what you're doing has this inherent effect to get other people to want to back what you're doing. Social proof is huge, and so it's important to build a community or a base of people that can advocate for you, especially if it's like a consumer product or offering. I think that's, you know, even that much more important. There's lots of different things on the marketing side that can allow you to build that community or brand credibility per se. There's just different tools that you can do. You can also do like influencer marketing, for instance, so you can engage thought leaders within your space that have a following, have credibility. And so if they're able to back what you're doing or say positive things about what you're doing and that goes a long way, you can repurpose that content for actual ads, which is great. Or you can actually now have this medium reach their audience with your offer. Influencer marketing is great. Publications is another strategy. Online news publications oftentimes that have a lot of engagement within your sector. Most publishers offer media kits or opportunities to market in tandem with their brand. So whether it's an article placement on their website or an email news blast to their email database, they'll give you all the stats on the demographics of their following and things like that. But kind of doing placements with publications is great because you're now associating yourself with a bit of a community or another logo that people recognize. There's giveaways that can be done. I think that's more of a crowdfund strategy. You know, we do lots of event promotions to for larger scale raises. So we'll do like more intimate in-person dinner seminars so that you can actually meet potential investors. Or we could do larger, like multi-day conference promotions as well with speakers and things like that. So the more people that talk about you talking about your brand, it just makes sense. The more credibility you have and the more people will actually listen to what you have to offer. Yeah, that's a good point. Really got to be okay with getting yourself out there. The clients that are doing that are doing well, and we've seen clients that have started doing that, doing a lot better once they actually get themselves out there. That was a good couple of points there. I was going to just ask if you have any final piece of advice on this topic. Although I feel like you did cover a lot of ground there, but I don't know if you had one final nugget you wanted to drop on on the audience. If you're going to raise money online, you want something tangible to offer. I had a conversation this morning with someone super nice guy down in Texas. He's got a great idea, but there's just nothing. You know, he's not kind of ready to actually market it to some sort of online capital raise campaign. Like it's just an idea, right? I think it's important. Like at the end of the day, if you can bootstrap an idea and see success, that's good proof of concept, because then if you're kind of trying to raise money off of an idea online, I don't think you're going to have much success. Yeah, I think that's a good point. I think it's largely like Kickstarter is a good venue for that, but like putting paid dollars behind just a concept is is definitely tougher. I would say my piece of advice would be cash flow planning, maybe a more tactical piece of advice, but that seems to be something that really important as you get into this. And for founders to have that mapped out ahead of time, we help with that as well. So it's not a solo exercise, but that, I think is one of the key parts of understanding whether you're res ready. And this is a great avenue to kind of scale your growth as well. So if you're already seeing success or you've already got something in market, this can really help accelerate your growth and get you to that next level. Nice. Branded. Well, I think we covered a lot today. Episode two I think it is great to share some of those tidbits helping people to get started. So thanks for joining up today. I'll see you on the next one.