Venture and Growth Fundraising: What are the bear traps to avoid?
When you look at the attrition rate between the number of deals that an investor gets to see each year and the numbers that they actually transact (I won’t scare the reader by repeating it here), you can start to understand why, with the odds seemingly stacked against you that fundraising can feel like an uphill struggle and for some will be a race against insolvency.
Successful fundraising is all about being prepared – not just having the business plan and knowing your market, competitors and numbers inside out, but being prepared for the investment process – which may involve a significant number of investor meetings, a lot of time and effort answering early diligence questions, a lot of sharing of private information in the knowledge that most investors after all that effort will still say “I’m out”.
The problem is that fundraising is based on asymmetric negotiation – you need the money and quickly, the funders have the money, but, are speaking to many more companies just like yours, all of whom need their investment. They can therefore afford to take their time to benchmark different opportunities, gather information on market dynamics and could well be speaking to your competitors before they make any decision, which still might be that they decide to not invest in your sector after all!
It can be difficult to know therefore who is genuinely interested, who is tyre kicking or information gathering and who just hasn’t the courtesy to give you a quick ‘No’ (which is worth its weight).
This is where working alongside experienced corporate finance advisers can help – the seasoned adviser should be able to identify those ‘buy’ signals and know when to press harder but also to know when to press pause.
There are several other practical steps that you can take however in preparing for a fundraise to maximise your chances of successfully navigating the funding market. You need to give yourself enough time to keep the process efficient yet competitive and for all the distraction involved in fundraising, remember that no deal is done until the cash is in the bank.
So, take your time to prepare well, run an efficient process and look to avoid the potential pitfalls:
- Failing to plan ahead – irrespective of whether you are raising £2million, £5million or £50million, it takes time to raise money so give yourself adequate time to complete the fundraise. At the very least, budget 6-9 months ahead of when you need the money in the bank to start the marketing phase to give you the best chance of closing and avoid negotiating the future of your company from a position of weakness whilst facing financial Armageddon
- Weak management team – The management team is all important and you should assemble the best team that you can as early as you can. Gaps in the team can be dealt with and new talent hired but poor management will be found out. Well-connected investors should also be able to help identify a strong Chairperson who can also help coach an inexperienced team.
- Hiring The Right Corporate Finance Advisers – Make sure that you get good advisers on board from the outset with adequate experience of your sector and stage. You want advisers who can both critically appraise your plans but also provide sage counsel on what to expect and how best to position yourselves to prospective investors. Ask your advisers who they have done deals with – they should have strong enough relationships to fast track getting you in front of the right decision makers.
- Lawyers – Deals don’t complete without an awful lot of paperwork and negotiations continue well beyond the agreeing of a term sheet right up until completion. Seek recommendations as to who to use – your Corporate Finance advisers should be able to point to suitably experienced individuals who are commercially focused and who aren’t going to waste your money arguing immaterial points. Good legal representation costs but is a vital investment.
- Talk investor language – Do not fixate on the technology – instead focus on your value proposition, size of your addressable market and be able to clearly articulate your growth and exit strategy. Investors want to know if you can build a scalable business that will deliver them 3-5x returns within five years. Avoid too much industry jargon and acronyms and simplify difficult concepts for your audience. Remember that the investor that you are dealing with will have to first convince and then bring his or her team and investment committee along too.
- Choosing the right business model – Investors like SaaS business models because a) they can scale quickly, b) they give good forward revenue visibility and importantly, c) they attract quite frothy valuation multiples. Accelerating the speed of securing and minimising the cost of customer acquisition and demonstrating the all-important ARR of £1M+p.a. should be the goal. Be aware that certain business models might trigger warning lights to investors – capital intensive businesses mean lumpy and unpredictable revenues, enterprise sales scream long lead times and IP models may point to difficulty in scaling (given that you are likely one step removed from the end customer). Sticky, scalable customer relationships with minimal churn are what investors look for.
- Avoid complexities in the Corporate Structure – Keep the cap table simple and avoid complex share structures for as long as you can. Make sure that you tie in the key people that you need either directly through equity or through options but above all, keep things simple. Investors can and do take flight because the share structure is either overly complex or the bulk of equity is in the hands of the wrong people or long-distant founders. If you do have a long shareholder register, then speak to your lawyers about simplifying the consent process, maybe through a nominee account structure.
- Don’t forget the day job – Above all else, do not allow the fundraise to distract you from the day job. Over the course of the diligence process, make sure that you deliver the results and milestones that you promise the investors. This builds confidence in your management and budgeting skills. If results slip, at best the deal will delay, at worst, the deal will fall away. Keep laser focused on the day job and hitting your numbers.
Fundraising can feel like it is a full-time job (and to some of us it is) and outside of the excitement of negotiating the deal itself, there are aspects of it that are unglamorous and monotonous and the process itself – with its own language, range of complicated structures and financial instruments as well as different investor approval processes can feel to the uninitiated a little opaque.
So, prepare in advance, prepare well and surround yourself with a quality management team and advisers that you trust to maximise the chances of ultimately securing that deal.
If you are looking to raise funding for your next stage of growth, we would be delighted to assist you through the process. Contact our team on 01491 579740.
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