Getting to Term Sheet Made Easier
OK, so you’ve already prepared your pitch deck and had first meetings with VCs, who confirmed their initial interest afterwards. Now investors will flood you with questions and data requests, which will effectively consume a lot of your time. Unless you are prepared for that in advance.
Fundraising is tough, there’s no doubt about it. Ask any founder after the round and she will surely admit that it took more time than originally anticipated. But there’s a lot you can do to streamline and speed up the process.
In general, venture capital investing is pretty straightforward. I think there are 3 critical questions each VC asks before making an investment decision.
- Is there a market for this product? (= market is large enough to create a big, profitable at scale company, there is a pain to be solved, timing is right)
- Is the product good? (=product brings value to customers who are willing to pay for it; it has some unique features or differentiating points compared to competitors)
- Will the team deliver? (= founders have a vision and will be able to execute the strategy or adjust it accordingly to the market conditions)
Finding answers to the above questions is not trivial. VCs spend tons of time and resources to thoroughly analyze each deal, and even though they have their own thinking and decision frameworks, many parts of the commercial analysis are similar for all investors. Being prepared for the most common requests will make life of both sides easier and increase you chances of landing a term sheet. So why don’t prepare yourself in advance?
Below you’ll find a list of documents that will help you streamline the process (it can also be downloaded as a spreadsheet file here). Of course, it’s not a one-size-fits-all list, but most of it should apply regardless of the startup maturity or business model. The structure is a bit similar to the one of your pitch deck’s but you should definitely go into more detail. So why don’t prepare those documents in advance?
- Historical financial & operating KPIs + forecasts 💹
Historical operating & financial KPIs help investors understand you’re on a right growth path and that you keep track of the most important metrics. It should also include unit economics overview as it is a must for further scaling and assessment of potential profitability at scale.
Forecasts (i.e. business plan) should cover period until at least to the next round and show what the raised money is going to be spent on. As I have already explained in the previous post, I am not a big fan of fancy long-term forecasts for early stage companies, but a consistent plan until the next round with key growth drivers explained is a must. Founders should already plan what needs to be delivered by the next round as well as understand the key growth and valuation drivers.
2. Cohort analysis (revenue & customer) 📊
Cohort analysis is extremely important for analytics, especially for businesses with multiple customers where churn plays an important role. If cohorts are a new concept to you, make sure to check this post by Christopher Janz asap. As with KPIs, cohort analysis should not be limited to financials but also operating metrics like number of customers or usage statistics.
3. Detailed product overview 🔍
VC must understand your product and what it does, especially if it’s a complex one with multiple features. Preparing a more detailed overview, sending a sales presentation or making a demo call should work in this case.
4. Customer acquisition channels 🙋🏻
How you acquire customers is extremely important and additional explanation might be required, especially if you have several customer segments and acquisition channels with different economics.
5. Sales pipeline 💸
Presentation of your current sales funnel is critical for proving that you have a structured and repeatable sales process. For business models with long sales cycles, value of your current pipeline is a key indicator of growth over the next few months or a year. It is also extremely important for internal analytics of what could be improved in the process.
6. Case studies and/or customer references 👌🏻
While somewhere in the process VCs usually request to conduct customer reference calls, you don’ necessarily want to make it happen before term sheet. Case studies are perfect for presenting value of your product (not only to investors, but for other prospective customers as well!). Other forms of references like reviews or mails from customers might be sufficient at this stage if you don’t want to bother clients with requests to talk to VCs.
7. Market research & competition overview 📑
Any insights on market size and TAM are highly appreciated by investors and show that you know and understand the market you operate on.
Mapping out key competitors or more generally competition segments allows you to highlight your key differentiating points and uniqueness. It puts you in a good light since you are aware who you are competing against + it makes VC analysts’ work easier :)
8. Organisation chart & team 👕 👔 👗
Org chart gives a good understanding of your team structure especially when coupled with hiring plan until next round. It might be a good idea to prepare a quick bio of key managers or provide links to their updated LinkedIn profiles.
9. Cap table ➗
Investors need to know at some point what they are potentially investing in and if the cap table is healthy.
10. Investor FAQ ❓
There are surely numerous things unique to your business that haven’t been covered in this post, yet you are certain that some questions will be asked (e.g. what’s the defensibility of the business? what technologies do you use?). Preparing a document answering those questions is a good idea, as it can save you a lot of time and make you discuss with investors only the more detailed aspects of your business instead of going through the complete basics again and again.
I hope that you will find the pieces of advice presented in this article helpful and the fundraising process will not be such a struggle.
Please 👏clap if you enjoyed this post and ✏️comment to share your experiences or if something is missing!
The spreadsheet will be continuously updated with the good examples or templates of documents — if you know any that could be presented there please let me know!
Inovo Venture Partners backs early-stage, post-traction startups that can grow 100x. We partner up with ambitious founders like Stefan from Booksy, Maja from Zowie, or Marcin from Spacelift. We invest between €0.5–2m in startups from Poland and the region.
