So, you started a company. You spend every waking hour you can on it and your excitement is palpable to everyone around you. However, you realize you’ll need cash and you’ve already invested everything you had. Looks like it’s time to fundraise.
Preparing your startup for a fundraise means putting yourself and your business out there for evaluation. Whether we like it or not, this is something that businesses need to get used to as they grow.
As David Davick, CFO co-leader of the Transaction Advisory practice at Propeller Industries describes it, “Opening the doors to prying eyes is not just petrifying but stressful. Even the tiniest details can seem off-putting and for startups struggling to stabilize themselves, it’s imperative that you are as prepared as possible before heading down this path.”
Hire Professionals, You’ll Save Time
When you have something wrong with your car or if you have a leaky pipe, how many of us turn to YouTube videos or internet articles that we could teach ourselves how to do the work?
There are definitely some who do that, but most of us look to hire someone with the experience and knowledge to quickly diagnose and fix the problems.
Why? Well, the reality is that we only have some much time and while there are lots of things that we could do ourselves, there are some things (like running our business) that only you can do.
Consider that when you are preparing your business for a fundraise. You can either spend a lot of time guessing and risk losing opportunities along the way or you could have Financial, Supply Chain or Communications professionals help to simplify the whole process for you.
Aaron Alpeter, CEO of Izba states, “There are specific aspects of evaluation preparation that experienced supply chain teams can handle reliably and quickly. And at times like these, you may need more than just your in-house players to impress investors.”
These experts will point out weak points that may be scrutinized by potential investors. Their experience and exposure in the market will prove invaluable as they guide you through the preparation process.
By vetting your business extensively beforehand, it’ll be a routine drill by the time you get to the actual investor pitch.
Consultants will also serve as your mentors and identify ways to improve your stance in negotiations such as the appropriate legal counsel with the right expertise.
It’s imperative that you have a legal team at your side during negotiations as anything that gets accepted will become enforceable by law.
Not only will they help you avoid major pitfalls in your term sheet, but you also need to be sure you don’t cross any legal lines.
Which means you’ll need a reliable and competent team of experts dedicated to helping you prepare for evaluations, specifically, the factors that your business will be judged on.
Start with Evaluation KPIs
“There are three KPIs that every business, whether you’re Apple, Amazon, or, Bob’s T-Shirt Shop, is going to be judged on.” declares Aaron.
These three key performance indicators are:
- Cashflow
- Profit
- Growth
Depending upon your stage of business, investors will prioritize these KPIs differently. Most early stage startups are unprofitable and so you’ll prioritize Growth. Startups with some traction will need to show a path to profitability, and more established businesses that aren’t growing as quickly usually prioritize Cash Flow.
It’s important that you understand what you need to prioritize and make plans for improvement at least 6-12 months prior to any assessment or evaluation. Not only will this improvement take time to reflect in your charts, but it will also require several changes to be made along the way.
Preparing the Pitch Deck
Pitch decks are important in that they are the first impression you give to your investors about your company, but they are not the end all, be all. “The point of the deck is to pique their interest and for the investors to want to have a conversation with you,” says Aaron.
Ultimately an investor is going to decide to invest or not invest at a specific price based on their perception of your market and how you’re performing against those core KPIs. David adds, “If they are interested they will ask for lots of information outside of your pitch deck and will do their own analysis.”
In most cases, startups should focus on brevity. The basic structure of your pitch deck should include:
- The market that you’re targeting
- The problem in the said market
- Why hasn’t the problem been solved as of yet?
- Root causes and solution attempts
- What makes your organization and team the right people to solve the problem?
- The vision or the ideal solution that is to be achieved
There are several different ways companies have gone about presenting their pitch decks at various stages of their business development lifecycle.
The Evaluation Process
Once you’ve attracted some interest, investors will start to evaluate your business as an investment and you’ll need to evaluate them as potential partners.
This will mean a lot of scenario-based questions along with supply chain evaluations.
In addition to digging into the core KPIs like cash flow, profit, and growth, they’ll ask about things like supplier and vendor contracts, your underlying assumptions about inventories such as demand forecasts, and the experience and capabilities of your team.
This is all done in the due diligence phase in order to make sure that your business model is reliable for long-term investment.
However, it’s important to note that this process isn’t the same for every company. And it’s not just about the industry or niche market either. Every investment firm is going to have its own way of doing things. Their perspectives can vary along with their methods and criteria.
David says, “Depending upon your business, you can expect a series of meetings that will entail audits, evaluations and questions aimed at finding flaws or discrepancies in your business data, model or even your infrastructure.”
Another thing to note here is that your business scale and stage of development also factor into how these processes can go. Things like the capital that the investors are willing to spend and the size of the business they’re considering can change things a lot.
So, if they’re taking their time and continue searching, it’s an uncomfortable, but good sign.
The Offer
Once the evaluation is done to their satisfaction, VC’s will make you an offer detailing the amount they’re willing to invest and the terms of their investment. This is called a term sheet.
Just like any other deal, you can’t be sure that this is the best offer you’re getting which is why it’s important to not be hasty.
Aaron points out, “You can say no to a deal if it sounds unfavorable. Whether it’s the amount or the terms that are unacceptable for your organization, you reserve the right to decline any offer you don’t like.”
Your legal team will spend time going through the tedious documentation and figuring out things like liquidation preferences, warrants, buying rights, intellectual property retention, etc.
Due Diligence
The due diligence phase will include thorough analyses as well as comparisons of your business and its financial situation.
Other than comparing your current situation with your past, investors will take the information available on your competitors and compare your operations and finances with the biggest ones.
You’ll have to be aware of the market situation and how the approach you’re taking is going to be successful.
Different teams will take turns trying to come up with ways to probe your business idea. You’ll have to provide assurances in the form of exit strategies, harvest strategies, etc. You’ll also be questioned with scenarios, both likely and unlikely to happen in the future market.
They’ll judge your business to see whether it will stand against all odds. Whether your product or business can be ousted by technology, market situations or government policies, etc.
Closing
The closing phase of the evaluation process entails careful consideration of the offer that is made. Once a decision has been made, both parties negotiate the terms of the agreement. Legal discussions about repercussions are held repeatedly before parties come to a consensus.
If the offer is accepted, the contracts are signed and startups can start expecting their investments as per their contract.
Need Help Preparing Your Startup for a Fundraiser?
If you’re looking for help, experts at Propeller are only a call away to assist you throughout your fundraising venture and more! For more details on how to prepare your startup for a fundraise, read this guide.
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