Fundraising Process for Startups

Raising venture capital means being answerable to an Investment Director, and losing much of your independence. You need to be prepared to relinquish control over some decision-making impacting your company such as its direction, governance and operation.

The style and intrusiveness of investors may lead to further pains down the road, yet, obtaining VC money is also a first step towards an exit or IPO, where you’ll need to deal with much more stringent due diligence and regulatory transparency requirements. You should only consider this path if you’ve created something that works, and cash is your primary constraint to scaling.

Much of the fundraising process when raising VC money is driven by one simple fact. The money you are raising is not from a principal, but from a group of custodians; individuals who are tasked with providing financial returns to their own investors, over a defined period of time.

In most cases, you will be wedded to your investor for at least 5 years. Founders should therefore spend time researching and getting to know their potential investors, as early as possible, in order to be in the best negotiating position possible. Specifically, consider the following factors:

• Criteria: Industry sector and investment stage
• Fund details: Size, fund date and available capital left to deploy
• Number of investments per quarter, including recent investments
• Value-add: Many VCs market themselves as providing smart money, but often the ‘value-add’ is overplayed so don’t rely on them to scale your business. You need to do it yourself
• Ability to follow-on in later rounds

Make a list of your top 20 investors and start from the bottom to ensure that by the time you reach the top, you’ve nailed your pitch.

Once you’ve identified your preferred investors, there’s still a choice within the organisation. You’ll need to find a lead partner within the fund to champion you. Choosing this person will depend on their sector expertise, how many portfolio companies they are currently managing and your relationship with them. The answers to the first two questions are typically listed on the fund’s website and the answer to the third is dependent on whether you think this is someone you can trust and can work closely with.

Ask portfolio companies for references. Are they still enjoying working with their investor? How did they find the fundraising process?

Before pitching to investors, ensure that you know your numbers and presentation inside out. Find a friendly audience, and practise your pitch in front of them in plain English. Practise the following pitches: your 20 second elevator, your 3 minute sale and a longer 20 minute presentation. Record yourself, replay it and give yourself a mark out of 10 for fluency, impact and enthusiasm. Repeat until you reach an 8 or above.

Getting an introduction is often the best way to approach funds, as it relies on you being able to use your existing network effectively and they will expect the introducer to believe in the business. Some funds opt for direct applications on their website, but this is still uncommon.

Aim to line up all your investor meetings in a similar period. Given that investors will typically ask for an exclusivity period, receiving multiple term sheets will put you in a better position and you will be better able to decide to whom you want to commit.

Having a business plan, including a one page executive summary, an investor deck and a financial model ready in a virtual data room will ensure you’re better prepared and help you review your business through an investors’ eyes so that any issues which are at the bottom of your to do list become a higher priority.

The fundraising process is similar across all funds:

• A deal is sourced via an introduction or initial meeting;
• Your business will be pitched at the next weekly pipeline meeting;
• You and the team will be asked to pitch to the fund;
• After further meetings, including partner meetings, and some basic due diligence, the partners may decide that they’d like to proceed and issue you a term sheet which will include their key investment terms, what they expect in return and what if scenarios, if things don’t go as planned. At this stage, you should instruct an external financial advisor (including lawyers) who will be best placed to help you negotiate good terms;
• Once you’ve negotiated and signed the term sheet, the investor will perform further due diligence (Technical, Commercial, Legal and Financial DD); and
• The lawyers will draft the suite of deal documents. The documents will be signed once DD completes.

Our guest author Jonathan Hollis is the Managing Partner of Mountside Ventures, whose mission is to optimise the fundraising process for European startups and investors by helping startups raise their next round of funding from late seed to Series B. Should you have any questions? You can easily meet Jonathan at our partner’s upcoming Private Equity & Venture Capital conferences 0100 Virtual – UK & Ireland scheduled for 20-22 October 2020 and 0100 Virtual – DACH Region taking place on 24-26 November 2020.