(This article is in three parts for ease of reading. Subscribe to the blog or to our mailing list if you don’t want to miss them)
The timescales involved in raising investment are different for every business and every round they complete. It is also very difficult to control the timescales because power and influence is often with the investor rather than the investee. This therefore means the founder has to view many aspects of the round from the investor’s perspective. The key aspects are everything from information required for due diligence to the time of year they want to get their attention and close a round. Like everything, planning and strategy will help but be prepared – as Mike Tyson said, “everyone has a plan till they get punched in the mouth”. A metaphorical punch of course.
One key point on timescales which is often the elephant in the room when discussing investment rounds is cash flow and ongoing business. The business needs to carry on during a round and continue to grow and tell a positive story. As one VC recently said, a founder cannot elevate fundraising over all other tasks they need to address to make the business a success.
Cash flow also has to be sustained with a “reasonable” runway available. Investors don’t like “keeping the lights-on money” and this is often a big challenge. The continued reliance on bootstrap tactics, grants, pitching competitions and early sales are important.
While time scales can’t be predicted there is a general pattern to expect for a seed round. There is an assumption that a seed round will follow boot-strapping that has delivered a product or service that attracts users or customers. The founder will have a story to tell of their business to date, the problem they solve, a clear understanding of their market and a clear view of what they need investment for and what it will create.
Stage 1 (6 weeks) – Investment Readiness and Identifying Potential target investors.
Startups seeking investment will have to get their house in order before opening their doors to investors. Giving a trusted third party, who understands startups, an opportunity to carry out a legal and financial review of the business will ensure there are no potential problems that will be revealed during an investor’s due diligence. It will also mean that the founder can supply a full financial and legal pack once an investor shows serious interest.
One common piece of housekeeping is the Cap Table. Often a founder will start boot-strapping and offer equity in exchange for services or support. These have to be understood and dealt with correctly during an investment round. Shareholders will have to be given an opportunity to follow on, they may accept they will be diluted but they have to be informed and managed accordingly.
The financial review can also include a third party valuation. The debates and discussions around valuing early stage companies is vast with many different ways of doing it. The most important thing to remember is that there has to be some sort of methodology and justification for your valuation. There is also an argument that it has to contain a degree of wiggle room to allow for negotiation with investors that won’t leave the founding founder in a difficult position.
As part of the financial review the founder should apply for SEIS/EIS authorisation because while it can’t be the main motivating factor for an investment, it will often be expected and can lead to long delays.
This planning period is an opportunity to revise business plans and prepare pitch deck, information memorandum, teaser document and if potentially using an investment platform, video and digital marketing material. These documents will change and must be prepared in a way that they can be edited to meet the needs of the investor. Quality is also very important as the businesses brand has to be reflected through all documentation. An investor might question professionalism if materials are poorly produced.
The founder has to also use this time to consider who they want to invest in their business.
- Angel investors (individuals/ syndicates), will they have an active role or be passive.
- Funds ( local government backed funds/ family office/ industry specific/ eis/seis / institutions/ accelerator backed funds/ VCs)
Research is vital as understanding their track record and performance is key. Then utilising all professional and personal networks to find potential introductions. These should be managed delicately as a business will often only get one chance and a blown first meeting can feel like one of Mr Tyson’s punches in the mouth.
I’ve suggested 6 weeks for this. The list below is potential delays.
- Slow lawyers and accountants.
- Slow marketing or designers.
- Slow EIS/ SEIS authorisation by HMRC.
- Difficult existing share holders.