Five Best Practices to Effectively Manage Fund Raising

Don’t let ineptitude get in the way of financing your company’s growth

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Introduction

Tech CEOs often end up wasting a lot of time raising capital owing to the lack of appropriate knowledge, planning, and a formal fundraising framework to help them seamlessly manage and raise capital from investors and the general market. The problem only exacerbates if you’re from a sales, marketing or a pure play technology background that hampers your ability to become an expert in finance. Nevertheless, it’s inevitable for any startup founder to become adept at the art of fundraising.

Core Insight

Build a robust ‘five-point framework’ covering all aspects of the ‘funding life cycle’ to effectively plan, manage and raise capital with minimal wasted effort.

The Five-Point Framework

To build the framework you need to primarily focus on five key areas:

1. Find the right investors up front
2. Develop investor pipeline and track interactions
3. Identify a lead investor
4. Build a virtual data room for due diligence
5. Use proper communication protocols

Target the right investors

Ensure your idea or business falls in the investor’s sweet spot. The sweet spot is mostly a function of the industry, geography or stage of funding. Additionally, some investors may ask you to fulfill further criterion or additional sweet spots like having paid users, traction, minimum funding size, diversity or social impact.

Also, ensure you do a reverse assessment as well by making sure the investor too fits well for your current and/or future investment needs.

Tip: Make a list of potential PE, VC and angel networks, and go through their websites to identify their sweet spots. Mark the ones where you meet the sweet spot criteria for further communication.

Develop the pipeline and record interactions

Once an initial assessment is done, find connects through your existing and extended network to create first level connects with the short-listed investors. Ensure you record all interactions with them and remember to make each interaction count. Use the learnings and intelligence from these interactions to continually build and refine your pitch deck, corporate one-pager and the elevator pitch.

Tip: Make an excel MIS and record the following information:

• LinkedIn connects who can introduce you to their investor connects
• CEOs/Founders of similar startups who can introduce you to their investors
• Investment pitch events and trade conferences
• Angel networks, accelerators and incubators focused on the sweet spot
• Mark those VCs where you directly have an ‘in’. Target partners in these firms who’ve led investments in a similar sector before
• Can the shortlisted investor act as a lead investor or not? — Yes/No
• Investment size — Typical ticket size
• Lead partner
• Investor sweet spot
• People you’ve interacted with in the firm
• Prior co-investors, investor relationships
• Reverse fit: Does the investor fit with your needs (Very important)

Finding the lead investor

Find the guy who brings domain expertise, whose sweet spot is met by what you’re trying to do, and who can be the person leading discussions with other investors for further funding when you plan to raise larger amounts.

A lead investor is somebody who has an established brand name in the market, and has substantial experience in handling and achieving success in the sector, market or industry you operate in.

In a syndicate of investors, the lead investor negotiates on behalf of all the other investors. The terms and conditions he agrees with is applicable and acceptable by all other investors. This is often the preferred mode when large sums of capital are involved and is often helpful for the founders because an experienced financial expert is negotiating the deal on their behalf.

Tip: Often you’ll find interested investors but they will not commit until there is a lead investor and a negotiated term sheet. Identifying a lead investor will allow your startup to raise more capital with fewer meetings, and simplify the negotiation process as the lead investor will negotiate terms for all investors in the syndicate.

Managing due diligence

A virtual data room is a place where you keep all your financial, legal, business and technical documents for review by prospective investors. Provide access to the investor once you have a signed term-sheet or a non-disclosure agreement in place. Use free online cloud storage services like Dropbox, Google Drive or OneDrive to build and maintain the virtual data room. Finally make sure you track accessibility to all folders. Make separate folders by investor/VC name and give ‘read only’ access to investor’s team and lawyers.

Tip: Due diligence and managing multiple information requests from VC’s lawyers & accountants is often a time-consuming and albeit frustrating process that could distract you and your team from your core business activities. Managing data this way will go a long way to smoothen out the process and meet their information requirements in a quick and hassle-free way.

Follow appropriate communication protocols

The elevator pitch

The elevator pitch is your ability to deliver your core offering, business model and market opportunity in a 30-second time frame. If at the end of an elevator pitch the investor asks you ‘So, what do you do exactly?’ know that your pitch isn’t effective and needs rework.

Tip: Often we ask our close network of friends to introduce us to a potential investor. Your connect would typically ask for a ‘blurb’ about your company. This ‘blurb’ is nothing but the elevator pitch.

Company one-pager

A very useful document essentially used during pitch events. It is an extended version of the elevator pitch. Use this as a hand out for the judges to learn about you and jot down their questions while you’re pitching. It’s a document which is slightly longer and contains key ideas, opportunity and target market details.

Tip: A corporate one-pager usually includes stage of the company, revenue traction, market sector, amount raised till date, amount currently raising and existing investors.

Pitch deck (max 12–14 slides)

The pitch deck is a self-serving document for an investor to understand all key aspects of the business without the presence of the founder. A typical deck will touch upon areas like the problem, solution, product, market size, competition, team, financial projections and how much you’re looking to raise. Additionally, data on customer traction and user feedback can be added.

Tip: Keep the pitch deck’s overall size below 20 slides, ideally 12–14 slides. These are living documents which requires constant finessing and improvement every time you learn something new from a potential investor.

Conclusion

Fundraising could be a tricky and challenging activity if you don’t possess relevant and specific financial experience. As an entrepreneur, it’s your job to get comfortable with the whole process and follow these best practices to avoid wastage, improve your odds to raise capital and connect with the right set of investors for current and follow on investment needs.

Full Report: http://bit.ly/Gartnerfundraisingframework