The Asia Pacific (Apac) region is a hub for innovation, characterised by a dynamic start-up landscape that is driven by passionate entrepreneurs who are constantly looking for ways to improve support systems. Yet, amid this momentum, early-stage founders often encounter hurdles when trying to raise capital.
Global economic pressures and volatility across markets have changed investor expectations and created gaps in expectations across a number of different fundraising and valuation variables. In recent years, it has become important to bridge these gaps to unlock the tremendous growth potential for start-ups.
Shifting investment terrain creates new venture capital obstacles
Last year, macroeconomic challenges across Apac — including higher interest rates, rising energy costs and inflation — led to a slowdown in fundraising activity. These factors exerted significant pressure on the markets.
A corresponding rise in the cost of leverage has resulted in more conservative investment portfolios, reflected in their investment allocations, and more scrutiny when undertaking due diligence on companies. This presents a problem particularly for many start-ups in Asia, as they often lag behind their counterparts in more established private markets when it comes to managing their company’s equity. They are frequently reliant on manual work by accountants, and this inefficiency can create roadblocks when it comes to an investor’s due diligence process.
In competitive investment environments, the speed of key investment decision-making is a critical factor when determining who secures funding and how much can be secured. If it is difficult for owners and investors to track valuations and equity ownership across a business, then the investment conversation slows down and opportunities can be overlooked.
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The other, ever-looming challenge for investors is the liquidity question. Apac historically has faced a challenging exit environment, marked by less active IPO markets, and fewer trade sales. This impacts the attractiveness of private equity broadly as an asset class where these challenges are further exacerbated.
The good news is that despite this new investment terrain creating obstacles for our start-ups, investors across the region still have a lot of dry powder, and Apac’s young workforce and growing middle class will continue to demand new products and services, attracting investment in innovative companies seeking funding.
The case for better equity management principles
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Strong equity management practices like clear ownership structures, well-documented cap tables, and transparent communication about dilution — the potential decrease in ownership stake for existing shareholders — show investors that a company is organised and minimises ownership-related surprises. This reduces the perceived risk for the investor and makes the company more attractive to fund.
Perhaps more importantly, a well-managed cap table demonstrates a company’s understanding of shareholder value and shows that it is planning for future growth. Within the cap table, things like allocated equity for future funding rounds or employee stock options are signals to investors that the company is preparing for future expansion and is serious about attracting new talent.
Speaking of talent, approaching equity management strategically can help to incentivise and retain high-performing employees through an employee stock ownership plan or other equity-based compensation vehicles. This not only motivates employees by aligning their personal wealth to the success of the company, but also signals to investors that the company prioritises building a strong team, another signal for future growth potential.
Ultimately, when a start-up’s equity is well-managed, it simplifies the negotiation process for potential investors. Clear ownership structures and transparent financials make due diligence smoother and expedite deal closure. They also benefit the company in the long run by facilitating a clear exit strategy, such as an acquisition, secondaries round or IPO, helping to answer the liquidity question.
Beginning your equity overhaul
Start-ups often work with lean budgets, so the idea of sinking costs into administrative resources to support equity and cap table management can seem unattractive, but hopefully the case has been made that taking steps early can bring immense value in the long run.
Fortunately, modern cap table management technology with the capability to integrate across a company’s tech stack has brought exemplary equity management standards well within reach of most start-ups. That said, there are critical steps for any business to follow before looking to overhaul equity.
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Firstly, consolidate all equity-related information into a single source, like a cloud-based storage system. This eliminates the risk of data loss or discrepancies between different documents. Be sure to build consistency across all recorded data, creating templates for grant agreements, shareholder certificates and other documents to capture information uniformly.
Have consistent definitions for all data-points used in your cap table to avoid confusion and ensure everyone interprets the information the same way. Your software should be able to support this, but forming good habits in record-keeping is always recommended.
Clearly outline ownership percentages for founders, investors, and employees with stock options, so that this structure is reflected accurately in your cap table.
Finally, automate intelligently. Innovation in AI is driving an automation revolution, and start-ups should seek to automate as many business processes as possible early on while adopting an end-to-end mindset when it comes to these processes. Know where the process first begins, what the ultimate outcomes are for each, and all the touchpoints along the way where events can be automated.
This extends to the cap table. Establish an automated routine for updating your cap table after any equity-related event, such as fundraising rounds, stock option grants or employee departures. Again, your software should be able to support this.
Automate your communication and audit trails to ensure shareholders are always brought on the equity journey. Update on any change to the cap table and keep a trail of all changes made for future reference.
Equipping for growth
By prioritising strong equity management practices, start-ups in the region will be able to better navigate the evolving investment landscape and position themselves for success. A well-organised cap table demonstrates professionalism, transparency and a commitment to long-term growth, making a start-up more attractive to investors seeking strong teams and innovative ideas.
While initial investments in data organisation and technology might seem daunting, readily available cap table management solutions make this process achievable for even the leanest start-up. Investing in clear and automated equity management now will empower your start-up to scale efficiently and unlock its full potential.
Bhavik Vashi is the managing director for Asia Pacific and Middle East at Carta
