Mind your P's and Q's: Fundraising Tips for Startup Founders
"mind your p's and q's
practice good manners, be precise and careful in one's behaviour..."
Many founders say that fundraising for their startup was one of the hardest things they've ever had to do.
I've experienced multiple startups' fundraising rounds. I've observed what works and what doesn't work and found that if you "mind your P's and Q's", you're well on the way to a successful fund raise.
Let's start with P's...
Pick a lead founder for the fund raise. Simply put, your business will suffer if too many of your team get distracted by your fund raise. The fundraising process takes an incredible amount of time. It will suck everyone in, if you allow it. It is the lead's job to deliver the fund raise, to allocate appropriate your scarce resources and do this as efficiently as possible. The lead should also spearhead the research on investors and the preparation of the pitch. For the pitches themselves, it may be necessary to have more of the team present (as team evaluation is a hugely important issue for Investors) however, when it comes to dealing with follow ups etc., then the lead should be the point contact and allocate any follow ups back to the rest of the the team. Treat the fundraising process like any other project. Put a project management infrastructure in place. The lead founder is usually the CEO but be careful not to leave her on her own in terms of practical and emotional support. She will need lots of both. If you can, allocate someone else to support her, to organize meetings and calendars, to prepare updates of pitches and to help respond to investor queries.
Pick a good lawyer (i.e. the very best you can afford). Fundraising is a complicated legal process. It is not a task for the family lawyer who prepared your grandmother’s will! Believe me it will end in (your) tears. Sometimes, specialized smaller law firms can provide better (quality and value) support than larger firms where there is a risk you may get a junior associate or someone in the larger firm that doesn't see enough of your type of deal. Ask in your community who the best lawyers are. While a good lawyer will help you navigate deal terms, it also makes sense for the lead founder to brush up on deal terms and the deal process itself. Brad Feld has some brilliant resources here and Venture Deals is great (https://www.venturedeals.com/). Your lawyer may also help with your capitalisation table (the "Cap Table"). This table shows % shareholding interest of each shareholder in your startup before, and after, you raise funds. Cap Tables can get very complicated depending on how you raise funding (e.g. convertible loans) so take great care to get it right. Some law firms may also provide tax advice. If not, you may need to seek a good tax advisor particularly if you are creating an Employee Share Option Program, dealing with issues around the granting or vesting of shares or raising funding where investors receive tax relief based off their investment in your startup.
Plan. There are many fundraising steps and once you have fully researched what is required, put a Fundraising Plan in place. Thankfully, there are a many web resources available out there to help plan the raise. Brad Feld also covers these steps in Venture Deals and I hope what I've written here will assist also.
Profit is the best form of funding. Many startups "bootstrap" the growth of their business by using the profits made each year to invest and grow their startup. Bootstrapping is harder for startups requiring large upfront investment (e.g. technology startups), so external funding can be used to plug this funding gap. Be sure to assess all your options for funding. Investigate local, regional or other government grant and equity options. Accelerator programs provide funding (although you may give away some equity in your startup so be sure to read the terms and conditions of your participation in the program). Debt and other working capital finance can be options for more mature startups although not usually for the very early stage ones. If you choose to raise external equity funding, be sure to understand that this is a huge step for any company and that such a step should not be taken lightly. You are "inviting" external parties (whom you will likely have known for a very short period of time) to take a meaningful stake in the operation and running of your startup (forever!). When it comes to equity funding, the so-called 3Fs (Friends, Fools and Family) are often the first source of this funding. Even if you are the very best of friends be sure to document these investments here properly. This protects them and also the company as future investors will want to confirm the deal terms. The second equity source is typically "angel investors". Angel investors vary dramatically in terms what they will invest in and in terms of what they consider a good investment. They will often be attracted to startups in domains they are familiar with or where they have made their money (e.g. from their own company exit). Angel investors often bring specific useful expertise and contacts to the table so always be sure to ask them how they can (and want to) help your startup. Angel investors are often open to investing in earlier ideas and can be more flexible when compared to the Venture Capital Firms (VCs). In relation to VC investment, bear in mind that the percentage of companies globally that receive VC funding annually is tiny. So while evryone appears to be talking in your ecosystem about VC funding it is a path actually not taken by or open to many. Furthermore, each VC will have a different idea of what "a great investment" looks like so be warned your startup may look great to one VC and terrible to another. That said, VCs are invariably looking for "home run investments" or investments that could return 10+ times their original investment as a return. You must realistically assess if your startup could achieve this outcome for the VC. So bearing all this in mind, if a VC chooses not to invest in your startup, that doesn't make your startup a "bad startup"; it's just not a good investment for that VC.
Propositions need to be clear. There are two key Propositions you need to articulate to your Investors: (a) your Business Model Proposition and (b) your Customer Value Proposition. In relation to your Business Model Proposition there are many versions out there. For example are you a consumer facing marketplace or a business to business software company or a direct to consumer app or a manufacturing company. Each startup has a different Business Model Proposition. You have to know yours. You can operate your startup and assess your performance against the right metrics for your Business Model. More importantly, if you are seeking external funding, investors will be evaluate your startup metrics based on what the investor considers the applicable Business Model Proposition for your startup. If you don't understand this, then your cannot speak to what success for your startup looks like and what metrics to consider. Also, be able to explain your Customer Value Proposition. You are answering the question as to why your customer will buy your product and how much value do these customers benefit? Explain why your Customer Value Proposition is defensible. Be clear who your customer is. This can sometimes be more complicated than you expect. You will also need to have a meaningful insight into your competitors and why you believe you can compete successfully against these competitors (what makes your startup unique).
Protect your intellectual property. You will expected to share a lot of information on your startup with potential so care is needed here to protect your intellectual property and confidential information. A Non-Disclosure Agreement (or "NDA") is a legal agreement drafted to protect the startup when sharing confidential information with third parties. An NDA can give your startup some protection around sharing this information. Note, the legal position here can vary in different jurisdictions, so check the status of NDAs with your lawyer (the good lawyer I mentioned above!). Some investors (and very often, VCs) will simply refuse to sign an NDA. In this case you may have to share information with investors without the protection of an NDA. Ultimately this becomes a judgement on the trustworthiness and credibility of the investor. Prepare a data room. This is an online location where you can store electronic copies of key company documentation such as employee contracts, legal contracts, the cap table, financials and other information an investor will need to be comfortable with before making an investment. This should be prepared at the start of the fund raise and updated with additional information (e.g. updated deal documentation) as the fundraising process proceeds. Maintain a record of who has access to the data room. Make sure the access is "read only" by investors to avoid accidental editing or deletions. Finally, password protect access to the data room and withdraw access to investors if they choose not to invest.
Press the pedal and keep it pressed. Try to close your fundraising as soon as you can. I cannot stress this enough and the times random external or internal matters can ruin or delay a deal getting completed. For example, if you have an investor ready to provide funding, try and close them out as quickly as you can in terms of signing up to the round or a Term Sheet. Don't delay.
Provide a Vision to Investors of what "success looks like" for your startup and for your Team. Having a clear "North Star" for your startup determines what you have to do, when you have to do it by and ultimately the shape of your future. If each decision your make is guided by your North Star you are more likely to make better decisions . It is your vision for what is possible that actually excites investors. Do not hide your ambition. Investors want to see it. In fact, this is what they are actually investing in.
Prioritise potential investors . Do your homework and rank investors in terms of potential investment amount and probability. Research investors in advance of contact. With VCs, try to understand their decision-making process, their investment "sweet spots" and who the decision makers are at the firm. Don't leave it too late to start trying to get meetings with VCs. Some VCs like to receive so-called "warm introductions" (a validation of your credentials from someone known to the VC). This can be hard to set up and may require you to attend VC events and at least becoming "known" to the VC.
Pipeline of investor discussions. Keep track of all investor discussions; you will lose track otherwise. Don't be afraid to circle back to investors that said no earlier in the process particularly if you have made a significant step forward or traction in the business (e.g. big sales, large customer, metric improvement) or you have secured a good lead investor. Having a credible lead investor has a huge impact on your ability to close a round and attract other investors. These lead investors typically set the terms for the round and will provide the deal term sheet and often lead the documentation negotiation to conclusion. Having a lead investor avoids having to negotiate different terms with multiple investors. Note angel investors (in particular) will be more receptive to invest in your startup if you have a VC as a lead or investing in the round.
Particular about your investor. Be discerning about who you select as your investor. Take time to get the right investor. You should have a clear picture of what you want from an ideal investor. Are you seeking a passive or active investor? Will you give up a board seat? Are you expecting the investor to add value through contacts or introductions or in other ways? It is also important to clarify the investor's position upfront on investing in further rounds after their initial investment (so- called "follow on funding"). What conditions or milestones does your startup need to meet to be eligible for follow on funding? Note angel investors can sometimes be less willing to invest in follow on rounds as they may not have the deep pockets of the VCs but your should ask all investors this question. In an ideal world you should try to include at least some investors in your round with an ability and desire to follow on. This is especially the case if your startup will require significant follow on funding (for example in hardware, medtech or other areas where the path to profitability could be many years). Otherwise, if your current investors can't or won't follow on, you will need to find a new investor for your next round. Importantly, you will also need to have a clear understanding of what a new investor will want to see in your business at that point in the future when are seeking that funding. What metrics will they want to see?
Provide regular investor updates. It is a very positive signal for potential incoming investors to see a good flow of historic communication between the existing investors on the Cap Table and the company by way of regular investor updates. This adds credibility to your the startup. Being disciplined around investor updates, board meetings and maintaining formal board minutes demonstrates that you take corporate governance and your investors seriously. It shows to new investors that you know how to treat investors. Believe me, this matters. I also recommend providing high level funding and business updates to all your potential investors on a rolling basis as you build your round (including those that said no, if they are open to receive updates). This can sometimes provide an opportunity to re-engage investors that had passed on investing at an earlier stage.
Pitch Preparation. The Pitch is one of the most important pieces of the fundraising jigsaw. Simply put, it takes enormous effort to get right. Prepare your pitch in different formats and for different contexts. For example, be sure to perfect your "1-minute elevator pitch". You can use this anywhere when you want to tell your story quickly. You may need pitches for different time contexts (e.g. 3/ 10 / 30-minute pitches). You will need to differentiate between the pitch deck you deliver in person (with more graphics and fewer words) with the pitch deck you might send in advance to an investor (more words to give context). Oh, if you have a black background on your pitch send a "printer version friendly" version to investors also. This saves money and the environment! When pitching live, always stick to your allotted time. It looks unprofessional if you go over on time. Also, the Q&A section after a pitch often gives the founder the chance to demonstrate domain mastery and to tell a fuller story of the startup. The best pitches tell a great story. If you can, hire a designer to help with pitch graphics, company branding and messaging in the pitch. A professional and slick presentation makes a difference. There are numerous resources online on the "perfect pitch". Guy Kawasacki's guidance on pitching is a great place to start (https://guykawasaki.com/the-only-10-slides-you-need-in-your-pitch/).
Pitch Practice #1. You cannot practice the pitch enough. Practice on friends and family, mentors, your neighbours, friendly investors and other startup founders. Frankly, anyone who will listen! Pitch to lower probability investors or investors who write smaller investments earlier in the process. Your pitch will improve every time you present it and nothing beats presenting to real investors to learn. If you have prioritised your Investors, you will then have the chance to optimise the pitch before the bigger investor pitches. Always ask for feedback (e.g. 3 positives and 3 negatives on the pitch). There is nothing to lose here and you will gain insights and you appear open to feedback. Practice the questions you would expect to be asked. I like to ask founders what question they don't like being asked! Record the pitches if you can, play them back and analyse them.
Pitch Practice #2 (The Remote Pitch). Pitch Practice is the only "P Heading" making a double appearance in this list however Remote Pitching is so important today, I felt it made sense to mention it separately. It is amazing how many basic mistakes many of us make in remote and online presentations. Common mistakes include poor lighting (e.g. camera facing a bright window), poor sound quality, low quality webcam, unstable Wi-Fi, poor eye contact from the presenter (look at the camera not the slides) or slides with overly complex transitions (you are asking for trouble here). Remote pitching is here to stay so it makes sense to have a proper set up. They are easy to record also so there is no excuse not to analyse.
P&L (and Balance Sheet and the all-important Cash Flow Statement). Make sure you have a financial model ready and correct at the start of the process and keep it updated. One of the most frequent first requests from an investor after an initial meeting is for your financial projections and financial model. This should not come as a surprise and it can be frustrating for investors to have to wait for this when requested. Be sure to have someone within the team who can understand and "speak to" the financial model. An alternative can be to have a good external accountant to lean. I would caution though, that if you outsource the preparation of financial model to an outside accountant, make sure someone on the team understands the inputs and the outputs of the model. I have seen founders getting lost trying to explain an outsourced financial model to investors. This looks awful. Your financial model contains the key drivers for how your business creates value for your investor and also how much cash you need to survive. You cannot outsource the understanding of this model to a third party. It is far too important. Personally, I prefer a simple model showing the key inputs, outputs and results than overly complicated model. This is particularly the case for very early stage companies where there are so many unknowns in terms of business performance. As founders, you need to demonstrate a clear handle of the unit economics of your startup right now and how those unit economics will evolve over time. This is intrinsically linked to my comments on understanding your business model proposition above.
Price. You will need, at some stage, to "price your round". This means setting a valuation for the company and this something founders can really struggle with. Understandably so because it is a somewhat opaque art to get the right answer. For extremely "hot Startups", it may be the possible to seek term sheets from different VCs where they will effectively compete to provide the highest valuation. Outside of this context, it can be frustrating for investors if founders are not able, or willing, to advise your valuation. Other startups can be a good source of market intelligence here and startup advisors and investors can also help here. If you are unsure on valuation, one approach can be to give a range of potential valuations (i.e. "between X and Y") and then firm up the final valuation up as the investor appetite for different valuation points is established. The investment amount (or "the ask") you are seeking should also be clearly communicated to investors and this is usually an easier number to determine. In the end, it is impossible for investors to invest in your startup without a valuation and your requested investment amount. Some key terms you will need to understand in valuation are the definitions of your company's "Pre-Money Valuation" or "Post Money Valuation". Also, if you are looking to create an Employee Share Option Pool, be clear as to whether this is on a "Pre-Money Basis" or a "Post Money Basis". I'm afraid I don't have space to explain these terms in this article but you can find definitions online (https://www.entrepreneur.com/article/312333). These definitions really matter!
Passion. Please bring passion to the process and particularly to your pitches to Investors. If you are not the most excited person in the room, why should the investor be excited? It is this passion that you will need to sustain you through the hard times and showing passion is a signal to investors that you will not give up.
Proper and professional. Do the right thing. Keep your promises. This goes to your integrity as a founder and integrity is one of the most fundamental characteristics an Investor needs to be convinced of before they invest. Two pet hates for me are (i) the failure of startups to complete tax documentation for investors particularly if the investor needs these for an investment relief; and (ii) the failure to respect the obligations to deliver regular updates to the investors. Be responsive and timely in all your communication with the potential investors. Every interaction with the investor should be treated like a step in an interview process. Stay one step ahead of investor requests. Have your business plan, capitalisation table, data room and financial model ready.
Persistence. Fundraising is hard on the spirit and on the soul. One of the advantages of being part of a team is that a burden shared is a burden halved! And while I have stated that you should have a lead founder responsible for the fund raise, the whole team needs to be there to support her. Knocking on doors and getting all those negative responses is not easy for anyone. A note to any solo founders reading this that there are investors who won't invest in a startup with a solo founder. Be ready to answer a question on this as you will have an extra hill to climb in certain cases!
Prudence. Cash is the fuel in the startup engine so don't forget to mind the cash in the bank. Make sure you have sufficient cash to keep the business process through the fund raise bearing the long potential timelines. Also, make sure your funding runway (i.e. estimated time after you have raised this funding before you need to raise again) is long enough (18+ months ideally). Otherwise, you will be back fundraising again in 6 months (and rereading this!).
Prizes. Startup prizes are great to but don't let them distract you. Conference speaking can be very time consuming also. Be disciplined on participation in prizes and conferences making sure they assist you in building your business or helping the fund raise.
Pay It Forward. You will get lots of help along the way. Don't forget to pass on good advice to your fellow founders and help where you can. One of the great things about being in the startup community, is that it is a genuine community working together.
And a few Q's...
Questions. When fundraising, you will be asked so many questions your head will turn. I recommend that founders also put themselves in the mind of an investor looking at your business. What do they see? Think about the questions the Investor is asking and what is important to them. What are the important issues for the Investor? How do they see your team? Are you addressing a real problem or need? Are you tackling a big market? What unique insights do you have on the problem or the market? How defensible your technology or offering? Have you made good progress to date? Ultimately, the biggest question you need to answer for an investor is whether your startup can deliver a truly exceptional return for that investor and that you and have the right team to make that happen? If you can answer this question positively, I am sure the P's and Q's should mind themselves...
Thanks to Angela Brennan, Paul McCarthy and Laurence Endersen for their help and input on this article. All errors are mine alone. Thanks also to my daughter Aoibhín for the illustration above. Finally, to the team, participants and mentors on the Startup Boost Ireland Fall 2020 Pre-Accelerator Program, it was great to be involved as a mentor and I wish all involved the best of luck in your ventures ahead.