The search for funding
Most companies need investment at various junctures to grow and develop. This usually involves going through multiple rounds of seeking funds from investors and justifying why it is needed. Every fundraising round is time-consuming and demanding, and success depends on assiduous preparation.
Seed funding for start-ups can be the most difficult to secure. This is the first official equity investment stage and is needed to transform an idea into a business and get it going. Without early investment, a company’s chances of success decrease significantly. In the UK less than half of start-ups survive the first three years and of these 82% fail because of a lack of funding and poor cash flow.
Competition for investment from early-stage professional investors is intense and is often a process of elimination. Start-ups are unproven and don’t have the performance and financial data that companies seeking Series A funding and beyond have accrued. Investors have little information to assess scalability with no previous venture capital investment to gauge how it has been used. Funding depends largely on investors’ appetite for risk, an acceptance of the founder’s vision, and an assessment of the start-up’s product-market fit.
Every company needs to prepare carefully to secure funds. This is as true for start-ups as it is for companies arranging an initial public offering (IPO). Below we consider how a start-up should prepare for fundraising.
Create a comprehensive plan
Planning demonstrates a professional approach to seeking funds and prepares the company for the rigorous scrutiny of investors. There are several key elements that should be included in the plan.
Timeline: A timeline provides the basis of the approach, incorporating key milestones up to the point funds are secured. It should allow for meeting several potential investors, their due diligence, and negotiating terms of investment. Contingency should be built in to prevent running out of money before securing investment. Whenever possible milestone dates should be agreed upon with investors when negotiating terms to avoid slippage.
Cash requirement: The company should know how much it wants to raise and what it aims to achieve with the investment. At seed funding stage this is typically setting up the business and operating expenses such as increased office space, operational equipment and staff. Investors will compare similar companies seeking funds and will expect fund requests to be specific, realistic, and justifiable.
Research potential investors: Business networks and other data sources can be accessed to find and research investors that best fit the company’s strategy. The focus should be on investors active in the company’s industry, their criteria for investing, the companies (and competitors) they invest in, and understanding their decision-making process. It is useful to build a pipeline of potential investors that can be nurtured and refined.
Preparing the financial model
Later stage investors will use a company’s financial and performance data to decide whether to invest and negotiate investment terms. Without this information, start-ups need to create a financial model. A start-up’s financial model is based on revenue and cash flow performance forecasts, customers, growth, and cost drivers to assess its profitability and viability. Financial modelling is crucial in preparing the business plan and budget to present to investors. It also helps founders to fully understand their business and to formulate and quantify assumptions that will be interrogated by investors during pitch presentations. Assumptions about growth trajectories and revenue drivers need to be sensible, ambitious and justifiable and demonstrate credible long-term vision.
Create a Pitch Deck
The pitch deck is critical to getting investors on board. It addresses investors’ questions about the start-up’s concept and strategy, its market understanding, the founders’ vision and how it will be achieved, advantages over competitors, what the investment will be used for, and the returns an investor will make. Investors review a lot of pitch decks and like to see them before agreeing to a presentation. The pitch deck, therefore, needs to make an immediate impact. Messaging should be succinct and clearly understandable, look professional, and provide the basis for a well-presented pitch narrative. A key component of the pitch deck is the executive summary which is crucial for landing a pitch presentation with investors. The pitch deck evolves with funding rounds and is often left with investors after the presentation.
Prepare the Data Room
A Data Room provides a significant competitive advantage at every fundraising stage. Companies are increasingly finding that using a Data Room increases their chances of raising funds and investors now expect a Data Room to be used from the earliest rounds onward. Investors view and analyse a huge amount of information in their due diligence process before deciding whether to invest. A Data Room enables a company to manage, organise and present its information professionally and provides quick and easy access for investors the company has pre-approved. Strict version control ensures the accuracy of pitch decks and other documents as they evolve over time. Companies can monitor and analyse investor activity; who is in the Data Room, which documents they looked at and for how long, which is extremely useful for engaging with investors. Engagement is further enhanced by Q&A sections and secure chat rooms for advanced discussions, negotiation and receiving valuable feedback. Most importantly, Data Rooms have a range of highly advanced security features that protect the company’s confidential and sensitive information from data leaks and unwanted sharing.
Practice the pitch
The pitching process often begins with a verbal pitch on the phone before a live presentation. It is vital that the pitch is practiced to perfection in readiness for both situations. Being able to respond to questions is very important. Having reviewed the pitch deck before the presentation investors will have questions about the financial model, competition, and market strategy. They will challenge the assumptions made in the pitch deck and executive summary so responding authoritatively to these is vital in building credibility. Many founders practice in front of their team and seek feedback from investors after each presentation in order to improve continually.
Preparing to approach investors
The company’s investor research should identify the right people within the best-fit investment firms to approach. Securing investment often depends on personal chemistry and building a relationship with decision-makers and influencers is crucial. Champions can be sought within the industry to endorse a company’s vision, credentials, and credibility, and make introductions to the right people, and help to set-up informal initial meetings. Professional and social networks also can be leveraged for introductions, and LinkedIn and other business platforms can reveal professional and personal connections to help engagement.
If you would like to see how Perivan’s market-leading Data Room Engage can help you engage with investors and securely share and track documents like executive summaries, contact the Perivan team who can arrange a demo and answer your questions.