This is a guest post by Lee Davy-Martin at Wilson Wright. Lee works with entrepreneurs and business leaders to bring ideas to reality. An industry agnostic, offering pragmatic and holistic advice, bringing a fresh perspective, being that of an entrepreneur with technical training in accounting, finance and tax. Specialist sector areas include Technology (Environmental, Fintech, Meditech), Property, Sport and Entertainment.
Fundraising is a perennial challenge for startups, particularly in the early stages. It’s a tremendous strain on founders, in both time and energy. However, when it goes well, it’s a thrilling confidence boost. Often an emotionally-charged experience, it’s crucial to approach fundraising with a plan and a process to ensure you remain focused and level-headed throughout pitching and decision-making.
After more than a decade of involvement in the fundraising process, I’d like to share my experience of the key do’s and don’ts – from raising funds for startups that I have founded, helping to raise funds for companies that I have invested in passively, and advising many businesses that I act for.
Top 3 Things to Avoid in Your Fundraise Preparation
1. DON’T get the timing wrong.
This is critical to the process. Nobody wishes to start the process too early and consequently raise money at a lower valuation than might have been possible. That being said, in all my years of business, I’ve never come across any Board that has complained about having successfully closed a funding round prematurely!
A much more common problem arises when businesses commence fundraising initiatives too late in the day – please make sure that this is not your business. If you’re not sure when to start, check out Seedrs’ guides on When is The Right Time to Fundraise and How Much Funding You Should Raise. This is particularly important if your business happens to be pre-profit. During this phase, month-on-month there is a cash burn, and this has to be factored in to ensure plenty of runway before closing out the round. My recommendation would be to ensure that there is always at least a year’s worth of cash burn held at the bank.
Be aware that the fundraise will take longer than you initially envisage, and no investor wants to be placing their money with a company that is at risk of running out of cash before closing the round. Buses always arrive when you don’t need one and, on the day that you are desperate, it is always late – you can assume the same of investment but with generally much more dire consequences for your business!
2. DON’T overvalue your startup.
As the Founder / CEO, you will be passionate about your business and believe that it is destined to achieve great things – you have to or else the business has no chance. Remember that a company will likely need 3+ rounds of funding in its lifecycle, and the valuation should increase with each round.
Dilution should be seen as an essential measure for existing shareholders (who, of course, could follow their money and reinvest), but dilution is much better than failure, and setting the valuation too high could lead to protracted periods of fundraising, distracting key executives from business plan execution and at best, there is an opportunity cost of not being funded. At worst, the business runs out of cash and fails.
3. DON’T present forecasts that are impossible to achieve or highly improbable given the historical performance.
Be very careful to explore and ground your assumptions underlying your forecast. Plainly state the assumptions, and underpin them with narrative explanations where suitable.
For example, are you presuming that the price of a key part of your product will remain consistent? Given previous trends and plausible future evolutions in your market, is that belief valid? What type of stress test can your business model tolerate if that key part price goes up?
If your company is currently pre-revenue, ensure you are able to sketch out a viable estimated time to revenue, and how much of your revenue is forecasted to be classed as ‘recurring’?
Top 9 Tips for Fundraising Preparation
1. DO have the best person lead the fundraising, but demonstrate that there is a team.
You should always put your best foot forward, and so you should have the most appropriate person in your team lead the process. That person, by default, will be out front and will be the ‘lighthouse’ for your business with the investors.
The importance of it not being about him or her though cannot be overstated. The investors want to hear that this is a business with a team, and business goodwill rather than a one-man crusade that will fall apart should they no longer remain within the business for whatever reason.
2. DO ensure complete accuracy and disclosure on your forecast P&L and balance sheet.
These are the cornerstone of any investor data room and will likely be the first documents reviewed by potential investors. They give the potential investor an indication of the likely trajectory of the business and consequential returns that can be expected from the investment. Investors will generally expect to see a 3-year forecast. Any arithmetic errors or obvious omissions in these documents will put the brakes on the fundraise, and so I would ordinarily advise you to engage with your accountants to assist in their preparation.
3. DO forecast cash flow.
The old proverbs ring true; turnover is vanity and profits are sanity, but cash is absolutely king. A business can survive without profits for a period of time (usually by raising equity or taking on debt), but the moment a business runs out of cash is the moment that the doors close.
I have seen many, many fundraising pitches which contain detailed and thoughtfully prepared monthly P&L forecasts with summary annual balance sheets. The problem with this is that an investor needs to be sure that the amount being raised is sufficient to deliver the business plan presented, and a cash flow forecast is the only real way to articulate this. It should reconcile to the forecast P&L and balance sheets, and so again, I would recommend working with your accountant unless you have ample in-house expertise.
4. DO make use of funds statement.
This can either be presented as a schedule or can be explained in narrative form in the business plan. Either way, it should link back to the forecasts and contain headline figures, refraining from granular analysis.
If Founder / CEO remuneration is part of the use of funds, care must be taken to ensure that this is at the right level. Most investors are happy to see the Board being well paid when the business is profitable and if the package is structured based on stretch business targets, but are less enthusiastic about funding such packages out of their hard-earned money.
5. DO have suitable Articles of Association.
If a shareholder’s agreement is not in place, the investor protections can only be provided through the Articles of Association, and so the Company should be proactive in agreeing to the Articles prior to opening the round. This will usually include as a minimum, pre-emption and tag-along rights. It’s worth noting that all fundraises on Seedrs benefit from the Seedrs Plain English Term Sheet. This makes it easy for businesses raising funds on Seedrs to get vital investor protections and contractual agreements in place as part of Seedrs’ service support.
6. DO state the challenges that the business faces.
I am yet to come across a business that has no challenges, particularly if it is about to open a funding round! By playing down or ignoring the challenges in your business plan, there is a risk that the investors see you as an idealist or worse, naïve. Better to explain the challenges and set out the corporate approach to mitigating them. Cognisant that some of this information might be sensitive, professional advice should be sought from your lawyer or accountant.
7. DO prepare a competitor analysis.
If your proposition genuinely is unique, then explain why, and if you do have any like-for-like competition but believe that your business is the market leader, again articulate why this is using facts and evidence rather than any bias. Your pitch deck is an ideal opportunity to demonstrate how this can be illustrated. Check out Seedrs’ template: Investment Pitch Deck Template if you’re not sure where to start, or read their blogs on how to create an awesome pitch deck or 7 top tips for a great pitch.
8. DO prepare to respond to investor queries and set aside sufficient bandwidth.
This sounds an obvious one, but I’m always surprised at how many raises fail because of a lack of bandwidth.
Fundraising is, of course, a distraction from business plan execution, but an absolutely necessary pursuit or else you wouldn’t be doing it. You will generally only get one chance to make an impression with an investor, and if you are slow to feedback or give rushed answers to queries, the impression then is that your house is not in order and that you are either too busy or lazy; neither of these outcomes is desirable when asking people to invest their money.
9. DO be clear on exit opportunities and time horizon.
I would recommend having formed a view of this in advance of opening the round. Depending on how many rounds have gone before, and the status of the business, an exit could be some way off. So, investors aren’t expecting you to have this path already set out with a buyer agreed and valuation in mind, but what they will want to hear is that you are focused on getting them a return on their investment, and part of that will be an ultimate exit at some point.