Last updated on April 7th, 2023 at 04:48 am
When attempting to understand how to raise capital or what that process entails, the startup entrepreneur must contend with a great deal of anxiety and frustration. It’s the main query often heard by business owners.
Before starting the capital raising process, the following is the basic outline of what an entrepreneur should anticipate and be ready for.
It’s not the only path, and it’s not easy either. It’s an opening.
Write a strong executive summary that is one page long. This summary should provide a general overview of your company’s operations as well as information about your initiative.
This paper will be used to pique the interest of any possible investors. be aware of how challenging it is to summarize your tale in one page. only include one page.
If You’ll hear back if a potential investor is interested. Moreover, it is the initial stage of a “warm introduction.”
Write a short, 60-second elevator pitch that sums up your company. Your Executive Summary’s business description is an excellent place to start.
Don’t use ambiguous language or statements like “We are the next Google or Uber.” An analogy that puts your business strategy into context, such as “We are like Amazon but focused on pet food,” is preferable.
Do not use acronyms. Not every investor you talk to is as knowledgeable about your company or sector as you are. After hearing an elevator pitch, the most frequent investor query is, “So what do you truly do or what problem are you solving?
An effective elevator pitch can generate leads, open doors, or even kill an opportunity if done poorly. After a brief introduction of yourself, you can utilize your elevator pitch as the introduction to a presentation.
Prepare a pitch deck for potential investors that details the company’s possibilities. You can use it as your entire business plan as well.
A pitch deck is preferred by most angel investors over a business plan document. Although it can serve as a stand-alone summary of your company, your pitch deck will mostly be utilized to communicate your story to potential investors.
It will probably have the same data as a formal business plan. If an investor (or investors) are interested in your company, they will probably invite you to come back for another, more in-depth F2F meeting or conference call.
An informal due diligence procedure has begun. Remember that even though they might have some gray hair, investors have excellent memories.
The template serves as a general outline of the data that should be included in a pitch deck. You’ll need to use creativity to tell a gripping tale. Please avoid using films and other artistic works that would take away from your company’s story.
How artistic you are doesn’t matter to early-stage investors. We are interested in your capacity to carry out your strategy and your market expertise.
Be ready to modify your pitch to a 3-minute, 5-minute, or 10-minute pitch. Create a scalable deck.
Get a “warm referral” to a possible investor in this step.
You can get a recommendation for potential investment from a lawyer, accountant, business counselor, or friend. By submitting a “cold application,” you join the crowd of applicants for funding.
You’ll be more likely to rise to the top of the list with a “warm referral.” Even if it won’t guarantee an investment, it will draw attention.
The individual who referred you will probably be aware of what the Investor wants to see first. simply an executive summary or a pitch deck as well.
Usually, the executive summary is enough to pique interest, and after that, a pitch deck or email introduction is asked.
Presenting to a possible investor in this step. Before gaining interest, you’ll give many presentations. Use every opportunity to practice your pitch.
Each pitch can teach you something. Request input then pays attention. It is important to view every criticism as useful. Remember that the Shark Tank program is just that a program.
Few investors are interested in stealing your company or your intellectual property. Most investors want to pick your brain. You must be more knowledgeable than they are about your industry and market.
Also, bear in mind that they have probably been there and experienced what you are.
They sympathize with your journey yet anticipate that you will persevere through the ups and downs. Before taking any funding, conduct your own research on the Investor or group of Investors. They’ll work with you as partners.
Investor due diligence is step six (DD). If a potential investor is interested, they will begin by informally requesting information about your business concept, finances, personal recommendations, and client recommendations.
They’ll go through a Due Diligence procedure after that, which involves a far more thorough investigation of the company.
You can probably request the possible investor(s) to sign a non-disclosure agreement at this point in your conversations (NDA).
Be ready to offer comprehensive details on your management team, employment agreements, capitalization table, corporate structure, financial information, material agreements, intellectual property, customer information and references, and a list of pending lawsuits during the due diligence phase.
Remember that whatever data you provide can be used for future DD initiatives or, at the very least, can be kept on hand for the subsequent capital raise.
In most circumstances, there is a further round. If the Investors opt to proceed, this DD phase can take 30 to 60 days to complete.
I have witnessed many agreements fail as a consequence of a lack of DD activity, delayed DD activity, or the dissemination of unfavorable information. Be as accommodating and receptive as you can.
Term Sheet, step seven (TS). The basic agreement between the Entrepreneur Entrepreneur funding and the Investor is outlined in this contract.
Most of the time, you may find templates or samples online. The legal paperwork won’t “close” the contract or secure you that payment.
This one to three-page document outlines the following information: the amount of the raise; the anticipated closing date or when you can expect to receive the funds; the type of investment (such as equity or convertible note)
the pre-money valuation of the company; whether preferred or common shares and associated preferences will be issued; the due date, interest rate, and conversion preferences; the composition; and the cap on the note.
Legal documentation to close is step eight.
To create the legal paperwork necessary to close the Transaction, you will unquestionably need the assistance of an experienced attorney
In some circumstances, it may make you feel more at ease to consult legal counsel earlier in the process perhaps while creating Term Sheet.
The amount of paperwork might vary greatly depending on the form of Agreement (Equity or Convertible Note) that the Entrepreneur and Investor have agreed upon. Finding a SAFE (Simple Agreement for Future Equity) template online may be all that is required to complete the paperwork for a convertible note loan.
You can find a typical SAFE agreement at SAFE: Valuation Cap and Discount. Y-Combinator adopted the SAFE Financing whitepaper largely to make first investments simple and affordable.
In any case, when startups and investors can’t agree on a business valuation, SAFEs or the more formal Convertible Promissory Notes might be used.
The assessment of the Company’s value is postponed until the following phase of financing, which most likely will be an equity round. You may read more about SAFE financing at Y Startup Documents.
The SAFE or Note typically has a 10–20% discount on the following round, a cap on the valuation, conversion rights, an interest rate, a note payback date, a minimum raise on the following round (qualified round), and consequences if the Note is not repaid on time or the following round of financing does not take place.
You can look up the definitions of all these phrases online or ask your business coach or advisor for clarification.
The main benefit of using a SAFE or convertible promissory note financing is that it avoids the expense of hiring an attorney and allows startups to close and use the money as soon as the contracts are signed by all parties and the check is received.
The Equity or Priced round is an alternative to SAFE or Note financing. The costs and time involved in this type of financing are higher, and more crucially, the money cannot be used until a minimum has been raised and a formal “Close” has taken place.
A company’s valuation is defined in advance in a Pricing or Equity round depending on a variety of variables, including revenue, intellectual property, product state, team expertise, market size, consumer traction, etc.
It is exceedingly challenging to identify the company’s valuation in a startup or seed-stage business; as a result, the majority of businesses and investors opt for some sort of note.
An equity round is feasible if the Company and the Investors can agree on a valuation (also known as a Post-Money Valuation) and the kind of stock that will be issued to the Investor.
The benefit of a priced or equity round is that the founders’ shares might be required to match their own, giving the entrepreneur more control. Common. Thus, the Founders are not given any special consideration by the Investors.
Discussions of voting vs. non-voting shares, anti-dilution rights, and common vs. preferred shares are issues for separate discussions and different books.
At this point, you are prepared to spend the money you have worked so hard to get. Remember that the Investor put a lot of effort into earning that cash as well.
Also, you must be prepared to put up with their scrutiny and need for updates and financial reports now that you have one or more partners to deal with on a weekly, monthly, or annual basis.
Don’t worry; the majority of investors are passive. They carry out their due diligence and essentially invest in the team that can complete the assignment the best.
Be prepared to release quarterly progress reports that include financial statements produced by management. Maintaining good communication with your investors is essential.
The worst surprises are ones like, “I’m going to run out of money at the end of this month.” The majority of investors believe you will eventually require more funding. Ideally, you choose investors with “dry powder” for the upcoming round.
If you have advanced significantly, the following round is likely to be an “up round,” which indicates that the company’s valuation has increased.
If you are attempting to raise more money but have made little to no progress, you should anticipate that the next round of fundraising will either be a “down round” or a “flat round.” The point has been made.
Last piece of advice:
- Treat the money as if it was yours and act as if you might not receive another dollar for some time. In other words, use it wisely.
- Spend it sparingly and only when necessary, as if you were bootstrapping.
- Make use of your investors’ relationships, expertise, and recommendations.
- Although you should hold your staff to high standards, remember to treat them with dignity and compassion at all times.
- Keep in mind that a board of advisors is answerable to the CEO, whereas a board of directors is accountable to the shareholders, particularly the minority shareholders. Choose both carefully.
- Appreciate the journey for its own sake rather than in search of the golden ring at the end of the rainbow.
Forget the mistake but remember the lesson