Preparing for the Fundraising Process: Forewarned is Forearmed

Despite the current economic climate, there are a number of firms looking to invest in great companies. But, the fundraising process is often complicated, a drain on resources, distracting to the business, and takes far longer than anyone ever expects. In our experience many startups often start without a sense of the kind of investors they want to target, the kind of round they want to raise, or the due diligence that will be required.

With some realistic expectations combined with understanding of the investment process and the supports needed, startups can smooth their path to raising the right money with the right partner as painlessly as possible. In this first of a two part series, we’ll cover the types of funding and investors, as well as understanding the key steps in a fundraising process.

“The good news is that there are lots of investors hoping to give the right startup money. The bad news is, “Fundraising is brutal.” The process of raising that money is often long, arduous, complex, and ego deflating.” 
Geoff Ralston, Y Combinator

What kind of funding do I need and who will invest?

Some businesses decide to bootstrap their venture through their own funds (perhaps supplemented by friends and family) and fuel growth through sales. This strategy has many advantages, not the least of which is the ability to control your own destiny. However, the need to accelerate the pace of growth may eventually require even the best run, bootstrapped business to go look for funding.

Your stage of business and what you are using your funding for will largely determine the kind of raise you will want to pursue and the type of investor you want to partner with. As your company expands and demonstrates a track record of success, each funding round will serve as a milestone in your journey.1

Seed (Angel)Series ASeries BSeries C/D
Funds before a start-up becomes operational. It’s the idea phase of a start-up when the founders are trying to perfect their product or service.Focused more on startups that have an actual business model that will be profitable. Startups need to have an actual strategy for taking investments and turning them into long-term growth, for example, moving beyond founder-led sales success.
Business is expanding and has a foundation of customers that is steadily growing. Round B helps startups transition into well-established growth companies.
Funds before a start-up becomes operational. It’s the idea phase of a start-up when the founders are trying to perfect their product or service.
Focused more on startups that have an actual business model that will be profitable. Startups need to have an actual strategy for taking investments and turning them into long-term growth, for example, moving beyond founder-led sales success.

It is also important to understand the types of investors you could be engaging with, their motivations, and what kind of involvement you want or can expect. For example, if you are at the seed or angel investment stage, you may be looking for a high net worth individual who can open doors and help you generate business but stay relatively hands-off in the operations.

If you are at the stage to raise a Series A round, you will be looking for a venture capital partner who has experience guiding growth companies with not just business development and networking connections, but also operational guidance. You can expect one or more members of the firm to require a seat on your board and increased scrutiny of the business. Your venture capital partners and board members will demand a higher level of rigor and frequency around performance reports as well as input on strategy.

What am I getting myself and our company into?

“Fundraising has now become the way to start up and fuel business development. More information and capital has become available for startup entrepreneurs. Yet, there can be more steps in the process than many entrepreneurs anticipate.”
Alejandro Cremades, Forbes

With a very few exceptions, a funding round will take at least six months to complete from start to finish. In many cases, the investment process can take up to a year to complete. Regardless of whether you are pursuing an earlier investment such as a seed or series A, or a later round, the process will consist of the same stages:

Preparation In the preparation stage, companies will start getting ready to meet with investors. Leveraging network contacts, investor day events, or “Demo Day” events, founders and C-levels should be conducting “lead generation” activities to identify investors whose focus aligns with your company and its stage of development. Companies should also be preparing their funding model and building their investor presentation. At this stage, it’s important to not underestimate the level of effort that will go into building your story and creating a compelling presentation. This stage can take from one to three months and will be driven by the founders and/or the CEO and CFO.

“Fundraising starts with a great investor pitch deck. Your presentation must tell a compelling story to capture the investor’s interest. It should communicate everything an investor needs to know to decide whether to investigate the investment opportunity further.”
David Adams, Senior Director Analyst, Gartner

Investor Roadshow You have your meetings booked and have honed and practiced your presentation. You are ready to go “on the road”. After some of these initial meetings you will likely continue to tweak your presentation based on feedback. Interested investors will start an initial process of due diligence and will want to see the next level of detail on any preliminary data that you have presented including financial forecasts. This stage requires the efforts of mostly the co-founders and/or CEO and CFO and can take from one to three months to complete.

Term Sheet Congratulations! You have an investor (maybe more!) who want to give you money. At this stage, the interested investors will present you with a term sheet with the funding amount based on a valuation of the company. If you have a number of interested parties, here is where you can shortlist and prioritize the partners you feel are not only offering you the best terms, but will also add the most value as you grow the business. Completing the term sheet will be primarily driven by the co-founders and/or the CEO and CFO and will typically take about one month to complete.

Due Diligence Now that you have a term sheet in place with one or more investors, the real fun begins. Due diligence is a rigorous process used by investors to complete their evaluation of the business and legal aspects before finalizing the investment opportunity. This is the other area where companies significantly underestimate the time and resources required. You can expect to be asked for detailed reporting on:

  • Commercial model
  • Customer/buyer profile
  • Market size and opportunity
  • Revenue forecasts and growth models
  • Technical and IP information (including patents/patents pending)
  • Management and organizational structure
  • Operations
  • Financial reporting and analytics
  • Tax considerations
  • Legal & Regulatory considerations (including risks)

“If there are red flags during the due diligence process, an investor can bring them up with the company. Many concerns can easily be addressed and not materially affect the deal.”
Roger Chabra, Managing Partner, Creation Ventures

Although driven by the co-founders and/or CEO and CFO, the due diligence process will also require significant input from the senior management team and department heads and can take as much as three months to complete.

Legals It’s the sprint to the finish line! This final phase is really about “dotting the i’s and crossing the t’s.” Due diligence is now complete and the co-founders and/or CEO and CFO, together with legal counsel will focus on finalizing the deal with the investor partner(s). There will be a number of legal documents that will need to be completed including the investor agreement, disclosures, warranties & indemnification, shareholder consents, and closing conditions. Together with due diligence this can take an additional three months to complete.

The entire funding process can seem overwhelming. But with some understanding of the process and what investors will require, early stage companies can make it easier on themselves and accelerate the time to close a round of financing. In part two of this series, we’ll share the secret weapon to smoothing the fundraising process: the data room.