Wrangling a Fundraising Round
Accomplishing a fundraising round for your startup is often confusing and mysterious for new startup founders. Lately, I have been reminded that the path is not as obvious when you are venturing forth the first few times as it becomes after you have been around the track. To help, in this post, I am providing a roadmap to the significant steps along that road.
Of course, each and every startup and fundraising round will likely have unique aspects. However, the fundraising process has some pretty typical stages that can be helpful to understand as you set out on your journey. I can say that fundraising almost always takes far longer and is far harder than one imagines it could be, so my recommendation is to drive hard – and be prepared for some potholes and bunny trails along the way to success. Here are the major stages to raising a round that I have seen in personally raising over 15 rounds of funding myself, plus helping coach others along the way.
1. Plan Your Raise
So, you have decided you need to raise money to build this business (do you really?). Raising from venture investors (including both angel investors and venture capitalists) means placing yourself on a focused path to achieve high growth and ultimately accomplish an attractive return-on-investment exit (strategic acquisition or IPO) for your investors. After you have decided that this business both demands outside capital as well as has the potential to deliver the kinds of returns investors are expecting, do some planning and financial modeling to determine what some of your critical upcoming value inflection points (milestones) are over the next 18-24 months and figure out how much money you believe you will need to accomplish those objectives. I recommend at least doubling what you think you will need because it always costs more and takes longer than you expect (those dratted unknown unknowns!). Plan to raise for no less than 12 months, preferably 18 to 24 months which is a typical timeframe for a financing round to support your startup’s operations.
2. Tell Your Story
Build a pitch deck and financial model that will tell your startup’s story clearly and concisely. Distill your elevator pitch. Pay lots of attention to trying to answer investors’ likely questions about the unmet need, the scale of the opportunity, your unique solution, the evidence you have for market demand and traction, market size, competitive alternatives, your plan for building the business, and the funding you need. This list is not comprehensive but is a starting point. Once you have a draft, get some friendly, experienced startup CEOs and investors (not your best prospects!) to review your deck and point out what is missing from your story. Revise. Improve. Gather and organize some backup data. Collect some documentation you will need to provide in a data room. Preparing to tell your story will be an iterative process, and you will need feedback to get on the right track. Get yourself baked for fundraising!
3. Find a Lead
Once you are ready to start sharing your story with potential lead investors (a great sign is when your “friendlies” want to start introducing you to people in their network for whom your deal might be a good fit), focus your attention on finding investors who are willing to “lead” (structure the terms of a round). This can mean knocking on many doors, but this is the most critical step in the process. A vital sign of traction is when a potential lead investor engages in preliminary and more extensive due diligence. If they are sold on your opportunity, they will propose and then negotiate the terms of the investment with you. This stage can take months and a great deal of effort.
4. Fill Out the Syndicate
Once you and your lead investor have agreed to terms (signed a term sheet, perhaps?), now you will want to find other potential investors who would like to participate in your round. This is called filling out the syndicate. Often your lead investor will take up to about half of the round, and you will be looking for other investors to fill out the remainder. Each of these syndicate conversations will involve pitching, some diligence (although they will often leverage what the lead investor has already done), and reviewing the terms of the round.
To find potential syndicate members, try the following tactics. Your lead investor will often have others they regularly co-invest with who might be interested in joining this round. Ask them to introduce you! Also, likely along the way to securing a lead, you met investors who took a look but ultimately told you to check back with them once you have found a lead. Verify that those prospects are acceptable to your lead investor, and then follow up with them. If acceptable to your lead investor, the syndicate buildout may also include making the rounds of a network of angel groups.
5. Finalize the Round
As the round comes together and you secure commitments that add up to your goal, you will answer many questions, address issues, negotiate the final versions of documents with the support of both the company’s and the lead investor’s attorneys, sort out Board of Directors composition, complete last elements of due diligence and address any conditions to close. I have found that using a simple written indication of interest form with which various investors (especially angels, but ask everyone to give you one) provide you with the name of their investing entity, the total amount of investment they would like, and other essential information helps solidify those “soft-circled” commitments into something more concrete. You may even find that as you approach your target investment amount, there is a bit of a rush that results in the question of whether you will accept some oversubscription. This has happened to me more often than not. You should be prepared to take a little extra money and possibly even have a fair approach – work this out with your lead investor – for allocating the round amongst interested investors. If you have venture capital funds investing, remember that they will need time to get their respective investment committees’ approval, and you will want to be actively aware of the timing of that process. At the end of this stage, you should know who your investors will be and how much each will be investing, in addition to having all the legal documents and other investment decisions made.
6. Prepare to Close
As you gather the verbal or preferably written commitments, you need to communicate, communicate, communicate to ensure that everyone involved in this fundraising is on the same page and tracking towards closing. Closely collaborate with your lead investor to coordinate messages and ensure that you use excellent project management skills to help everyone get aligned. Remember that there are many moving parts and busy people involved, so giving people specific action plans, all the information they need about what and how to sign documents, how to send in the funds, and what the deadlines are with plenty of time for them to get funds transferred around, deal with someone being out of town and unavailable for some period, and any number of other logistical items. This stage often takes a couple of weeks to play out, although sometimes you can compress the timeline or consider having first and subsequent closings if needed.
7. Close the Round
The closing date has finally arrived! Make sure you have a spreadsheet tracker that lists each investor, the amount of their investment commitment, each signature you need from every person who must sign documents, and everything else that needs to come together to create a closed round. Remember, your round is NOT closed until every dollar has hit your bank account and every signature is collected. Be warned that strange things sometimes happen on closing day, so keep your schedule open and confirm receipt of funds and signatures with each investor. Be proactive if anyone seems to be lagging.
8. Deal with the Aftermath
Once the closing has occurred, you are not done yet! Work with your attorney to issue stock certificates or final notes and whatever other documents need to be signed by the company and sent to the investors who participated in your round. Your attorney will also guide you in the various filings and notifications that need to take place legally. In addition, you will need to ensure that all of the important accounting for the investment is handled correctly and the company’s records are fully up to date.
Fundraising is a challenge – and these steps may vary a bit, but hopefully, this provides an overarching roadmap to the process so you can seek to avoid getting the cart before the horse! Remember that an excellent corporate attorney representing your company and having extensive experience with representing startup companies doing venture fundraising is a critical member of your team. When in doubt, check with them for support in this process (especially stages 3 through 8) and ask them to help you think ahead to future rounds, keep this round as clean as possible, and avoid missteps along the way. Don’t be afraid to ask questions, and make sure you understand the terminology. It is their job to help you do this well! Good luck!
Suggestion: If you are thinking about startup fundraising, note that I have a number of posts on various aspects of the process under the “Fundraising” category at www.StartupCEOReflections.com.
