First things first, what are the main stages of fundraising?
Pre-seed funding and bootstrap: The earliest stage of funding. 👶
This is where you stand: you have an idea and a business plan but don’t have the money to make that idea into reality. At this stage, you need money to create a minimum viable product (MVP), do market research, hire key people, office space, potentially register intellectual property (link) and whatever the company needs at this time.
Series A: The company’s first significant formal fundraising. 🚀
This is when things start to get really serious and when you have the opportunity to set up the groundwork for your business future. When you reach this phase, you will need investment to increase development, implement market strategies and to hire key staff.
Series B, C, and so forth: The scale up stage. 🦄
If you are preparing your business to attain investment after two or more rounds, congrats! By now, you have a well stablished product, service and team, but you are probably looking to expand operations and grow exponentially.
This is usually when the table turns. Meaning that you are not fighting for investors, they are the ones reaching out. But, of course, you still need to take additional cautions, as choosing the right partners at this level will definitely determine the future of the company.
And what are investors looking for?
📌 Team – People make the business, no doubt about that. You can have a revolutionary product but without the right team, you cannot properly scale. Investors will always look for something that stands out among the founders and key people of the company, like talented employees, solid management and passionate founders. It is the first thing they notice.
📌 Product/service – Of course, you need a product or service that solves a need and has the competitive advantage that makes it stand out and eventually fill in a market gap.
📌 Evidence of growth – VCs want to see your growth so far and the potential you have to grow even further.
📌 Global approach – If what you are offering is potentially scalable, the more value it adds to the investors looking at your business.
📌 Everything relating to the company – Through a sometimes long process of due diligence (see below), VCs will want to evaluate if an investment in your company is a good idea. This includes taking a look at every aspect of the business, since its financials to legal issues.
📌 Extra: In the end, they want a successful exit. Investors seek a return equal to some multiple of their initial investment or they aim at a specific internal rate of return. How do they evaluate that? Usually, even though there are others, through the Venture Capital Method.
This method assumes that the startup will undertake an Initial Public Offering (IPO) at some point in the future and provides the expected future value of the startup.
The venture capital method reflects the process of investors, where they are looking for an exit within 3 to 7 years. First an expected exit price for the investment is estimated. From there, one calculates back to the post-money valuation today taking into account the time and the risk the investors takes.
The return on investment can be estimated by determining what return an investor could expect from that investment with the specific level of risk attached.
Uses: The Venture Capital method is an often used in valuations of pre revenue companies where it is easier to estimate a potential exit value once certain milestones are reached.
Now, what is the normal fundraising process?
- Pitch– It all starts with a presentation to potential investors of your product or service, as well as the growth potential, market gap, and a brief business plan.
- Negotiations– Setting the ground rules of what will ultimately be a process of valuation of the business, the amount to be invested, the percentage of equity granted, and all relationship issues that will need to be determined in order to move on.
- Term Sheet– When negotiations reach a point of harmony, you generally sign a term sheet that resides in a nonbinding agreement that displays the basic terms and conditions of an investment, such as the amount invested, the investor’s share in the company, the startup valuation, form of investment and other rights and obligations of both parties.
- Due Diligence – Probably the longest phase of the investment process, as investors will leave no stone unturned in the process of finding every relevant information about the company. However, if everything is well organized and you are ready for investment, it should be a smooth process. This includes:
- Corporate organization and structure: articles of incorporation, bylaws, shareholder agreements, management and the official company registry documents.
- Financial information: financial statements, credit reports, analyst reports, financial projections, expenses, margins and profitability.
- Physical assets: listing of fixed assets and locations, equipment sales, purchases and leases.
- Real estate: listing of locations, copies of leases, mortgages and deeds.
- Intellectual property: patents and patent applications, trademarks and logo registration.
- Employees and employee benefits: list of employee salaries and bonuses, collective agreements, payroll information, incentive plan in pace and the respective employees equity pool.
- Licenses and permits: governmental licenses, permits applicable to the industry or type of businesses and environmental audits.
- Taxes information: local and foreign tax situation, audits or revenue agency reports, tax filings and social security status.
- Contracts: loan agreements, contracts between the company and stakeholders, partnership relationships, and all kind of legally binding agreements with third parties.
- Litigation: pending, threatened, or completed litigation
- Insurance: claims history and applicable insurance policies.
- External Services: Listing of all services firms used, including Legal, Accounting, Tax and Consulting.
- Drafting documentation– Getting every document ready for official signatures of both parties that will implement the terms of the funding arrangement you have already agreed to, such as shareholders agreement, investment agreement, articles of association, cap table, leaver provisions.
- Receiving funds – Once the conditions have been met and the documents are drafted and signed, they will then be executed along with the transfer of shares and funds, which will give place to some others post completion matters, such as the registry of the transfer, updating the company’s public register and filling other legal relevant documents.
- Getting back to business – The final step will be to continue to develop your business and grow even further.
Get Ready to Raise – Here are 5 tips.
- Decide how much money you need and get your valuation.
Before you start your fundraising journey, it’s essential to have a clear understanding of how much money you need and what your company is worth. This will help you to set realistic fundraising goals and to make informed decisions about the terms of any investment deals. Getting a professional valuation of your business can also help you to understand the market’s perception of your company’s worth and to negotiate the best possible deal.
- Create your unique and amazing pitch.
Your pitch is the foundation of your fundraising efforts. It’s your opportunity to showcase the potential of your business and to persuade investors that your company is worth their investment. Your pitch should be clear, concise, and engaging, and should effectively communicate the key value proposition of your business. Make sure you have a solid understanding of your target audience, and that your pitch is tailored to their specific needs and interests.
- Make your business plan and financial forecast.
A well-structured business plan and a realistic financial forecast are key components of any successful fundraising effort. Your business plan should provide a clear overview of your company’s goals, strategies, and operations, while your financial forecast should provide a detailed projection of your company’s future revenue and expenses. These documents will not only help you to convince investors of the potential of your business, but they will also help you to stay focused and on track as you work towards your fundraising goals.
- Search and contact investors.
Once you have your pitch and business plan in place, it’s time to start reaching out to investors. This could include venture capitalists, angel investors, private equity firms, or other types of investors. Do your research and find investors that are a good fit for your company, and make sure you have a clear understanding of their investment criteria and requirements. Be prepared to network, attend industry events, and use your personal and professional connections to build relationships with potential investors.
- Don’t forget that legal is on the foundation of fundraising.
Ok. You already know this. Legal considerations are a crucial aspect of any fundraising effort. Make sure you have a clear understanding of the legal requirements of fundraising, including securities laws, tax laws, and other relevant regulations. You need to draft and review all fundraising documents, including investor agreements, stock option plans, and other essential legal agreements. Having a solid legal foundation will help to ensure the success of your fundraising efforts and will protect your business and investors in the long-term.