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Fund Raising

As CEO, you are always on the look out to draw interest in the Company. If you are actively looking for funding, many of the tasks are self-evident driven by what investors ask for. Being prepared is very important, or fund raising will take up more than all the time you have. The challenge cited by most CEO's is how to avoid drowning in fund-raising activities making it difficult to pay attention to running the business.

If you are not actively looking to raise money, you still need to strengthen the profile of the business so that you are always in a position to go after funding should the need arise. The best time to raise funds is when you don't really need them (much like your credit rating to borrow money). You should be paying attention to the same details as you would when first fund raising -- strength of value proposition, growth potential for business, new innovation, execution excellence, management team, etc.

In many respects, the ultimate fund raising accomplishment is an unsolicited offer to sell the business (e.g. high value), so as CEO you never can take your eye off the fund raising ball. This section explores primarily a Series A investment path although much of what is described applies to any type of investment.

Types of Investment

Let's first get out the way talking about non-financial investments -- generally something to avoid. People or organizations looking to trade goods or services for shares of the Company rarely turns out to be worth the trade. You should be prepared to pay for these types of services, conserving precious equity for employees and proper investors. There are exceptions that work out, but this is not the norm.

Angel Investing

Individual or organized groups of individuals who primarily invest their own money in a young business. Angels often invest due to their confidence in the founder and sometimes the excitement of the opportunity (especially ones with high innovations). They focus on high risk/high return opportunities.

If you are only looking for a few hundred thousand dollars, Angels may be the best route. The effort required to secure angel investment can be less than traditional VC investment, but it is growing as angels look to increase their rate of success. One thing to keep in mind is that angel investors rarely participate in subsequent rounds of investment, so their prorated share of the Company tends to drop over time as does their appetite and ability to assist the Company. One alternative is to offer to buy out the Angel (at a premium) when a subsequent round of investment is done (it also helps keep the capitalization table clean which subsequent investors like).

Finding angels is often best done through the organized groups they belong to. You would need to explore which angel groups operate in your geographic area. Angels often attend investment conferences as well, so they can be reached this way if you have the time. Build personal relationships with Angel investors, they can offer a great deal in helping get a Company taking a few steps forward.

Venture Capitalists (VC's)

The predominant form of investment for technology companies is the VC. Typically small to medium- sized organizations responsible for managing 3rd party pools of money. The funds under management come from a variety of sources -- wealthy individual investors who want to have a VC manage their money with expectation for super-high returns (and are willing to take the higher risks) or pooled money from a variety of 3rd party sources like banks, retirement funds, mutual funds, union funds, government sponsored programs, etc. It's also common for the working partners of the VC to themselves have some money in the funds being used -- it's useful to inquire about this to better understand their motivation for helping you succeed..

A VC typically invests for the long haul, putting money aside to support a company through to a liquidation event. Although the follow-on money is never guaranteed, you should always validate that the VC has the potential to at least maintain their prorated ownership share if subsequent rounds are needed. It requires less due-diligence and legal effort to close a new round with existing shareholders than it does to find a new set.

A lot of VC's also invest in groups, which creates the concept of lead investor -- the VC who invests the most in a round. There is a bit of a trend where larger VC's look to complete a round in isolation so they have more control over the Board and hence the direction of the Company. Experience has taught them that a group of VC's working to help a company succeed is sometimes a recipe for failure given competing interests and experience. Single VC investments can be a good scenario if the VC is able to provide the needed Board-based leadership, industry contacts and operational assistance.

It's a good practice to talk to the CEO's of companies a VC has invested in. You should have no problem asking for these references although making the calls on your own accord may yield more insightful feedback. Ask detailed questions about what the VC partners are like working with, how they contributed to the Board, where they valuable operationally, how they handled business down-turns, etc. The more you know about who you might partner with, the better choice you will make. It's a marriage that you can't walk away from once the papers are signed.

Government Grant and Loan Programs

Governments at all levels often have grant and loan programs to help young businesses succeed. Governments are also increasingly turning to quasi-private sector groups to help run these programs to increase their rate of return on public money. These can be great programs to become involved in, especially if they do not attach any strings to the money -- such as where it is invested in (to create jobs). The better government programs do not put constraints on the money although asking for it to remain in-country is a reasonable one. These programs may have additional reporting requirements so make sure you can handle the bureaucracy.

A number of programs also offer funding focused purely on innovation initiatives and are independent of other fund raising you may do -- essentially, raise a round of financing and also collect the grant, a double bonus. Examples of these programs include IRAP and SRED in Canada and NIST in the US.

Family and Friends

Perhaps a first place to naturally go for financial support in building a new business but certainly the group with the most to loose if the business fails. Unlike Angels and VC investors, family and friends are not often experienced in loosing money. They are not paid to take risk and losses would likely impact their personal lives. Family and Friends (sometimes referred to as FFF -- Family and Friends and Fools) can help fund a few basics, beyond that, approaching experienced investors is a recommended route.

Keep in mind that it is very difficult to maintain meaningful ownership in a business if you can't participate prorated in all the subsequent investment activities. Someone who gives you $50,000 to help get started in return for 25% of the business, may wind up with 0.02% when the business is sold 7 years later for $40,000,000 returning $80,000. The $30,000 gain is not that much better than bank-based investments but the risk is much higher.

If you started by putting your own money in the Company and are now looking for external financing, you have earned a few stars when it comes to share ownership discussions.

Revenue

A subliminal reminder that the best type of investment is sales of your products or services. Boot strapping a business using sales revenue protects the unique position you have as an entrepreneur. It also makes certain that the growth in value is retained by the founders/owners when a selling opportunity comes along later.

Bootstrapping is not an easy scenario to manage, especially if you are entering a fast moving market. You are likely not in a position to grow fast enough to address the opportunity at hand. If you can combine a few years of boot strapping to buy you time to build value, a later financing event can be beneficial as you secure a more favorable valuation for your ownership position (more on Valuation later) than you would have had with an earlier funding event. Think revenue, revenue, revenue.

Engaging Advisors/Investment Bankers

Third party organizations that can assist with many of the fund raising tasks. Their strengths include industry contacts and extensive experience in what needs to be done to pitch a VC (e.g. pitch preparation, business plan creation, etc). It's a very expensive solution, sometimes charging fees as high as 10% of the money raised (5-7% is more common). It's a useful solution if you really have no way to get the process started yourself. They can also help with the details of the investment placement (e.g. meeting arrangements, due diligence, term sheet negotiation) although they typically can not help with any of the deep due diligence as they would not know your business that well.

If you do not want to part with the fee, you might be able to engage an independent CFO-type resource who can work under contract to help prepare for financing. Ultimately you need to have a pitch that gets you in the door, the rest is largely personal persistence and investor lead volume.

Management Team

It is often said that investors largely invest in the team, not specifically the technology or the idea (although technology does play a large part in what attracts investment). Great ideas are easily bungled up by an incompetent or inexperienced team, average ideas can reach high levels of success when managed by a team with experience.

You should be trying to identify a management team of at minimum three people to highlight in your investment pitch (including yourself). You can use people who are candidates to join the team should funding occur but be clear on this point so you are not accused of deceiving. Ideally you can show technical experience, sales experience and some level of operational experience within the initial team background.. It's much harder to raise meaningful money on just yourself unless you have a track record of entrepreneurial success.

Titles mean nothing (credibility means everything), so claiming everyone is a Vice President does not buy anything with the investor (in fact, it probably creates problems down stream when you want to expand the team with next stage experienced leaders). Just mentioned names and areas of expertise is usually enough. You can have backup material that includes organizational charts, etc -- it's a detail that often does not matter in the earliest stages of discussion.

If you are alone from a management perspective, and your background is primarily technical, make sure you first acknowledge this in your presentation and that you have a plan to find someone with business experience to join the team. If you can't create revenues, you and your company won't last long, so make sure you are candid about this..

Business Plans, Pitch Decks

The business plan for investment purposes is essentially a summary of a broader business plan document (the one you would use to actually run the business). Most business plan summaries are poorly written, easily set aside by an investor receiving dozens per month to look at. This is why your teachers encourage literacy as an important skill when you are young (hopefully you were listening). Before you even start to write a business plan for investment purposes, keep in mind the following:

  1. Brevity is better

    It's easy to think you need to write page after page describing key product features, details of the target market, long employment histories of the management team, stock material on key competitors and more. No one has time to read it all, so the story ending will not likely be reached. No credit for "thunk" factor. The opening few paragraphs tend to decide whether or not your pitch will be passed to the investors' researcher for further exploration, so make sure you say what you need to say as early in the document as possible. If you target 3-5 pages in length, you are probably in the expected ball-park. Investors will ask for anything they feel more information is required for (except the basic messages of course).

  2. Clarity is critical

    The investor reader may know about the market in general but not likely much about your proposed innovation or value proposition. Utilize great language skills to clearly state your case. This is a good time to practice how you would pitch potential customers although keep in mind your reader is an investor so using an overly sales or marketing writing technique does not necessarily gain points (be brief).

  3. Completeness is essential

    If you want to qualify your investor candidates quickly, make sure the summary materials contain everything that is needed in the first pass. Otherwise you spend too much time going back and forth with supplementary materials that eventually get out of sync with the main document. Most VC's make decisions by investment committees so the package they hand around needs to be self contained (not missing pieces that came in later). VC's are experienced investors but are not necessarily any more organized than you are (remember to be brief).

The business plan summary should capture your vision. You should have a vision that looks out for at least five years. It's easy to balk at this time frame saying "what do I know about what will happen five years from now". You will not be measured on how accurate your predictions are -- instead, the investor is looking to understand how you think. A five year business plan tells an investor:

Some key components of a great business plan summary include:

  1. Opening Message

    This is where you catch the attention of the reader. A well written opening is largely the only way the rest of your business plan is going to be looked at. If needed, consult a professional writer to make it as punchy as possible. Start with a strong statement of the business problem and value proposition and work out from there. Hit the key points in the first few sentences, mention what you are asking for and conclude with something compelling to peak the interest of the reader. A simple example might be:

    "According to Gartner Group, as much as 50% of IT spending is wasted on infrastructure solutions that do not work. As such, the CIO is increasingly looking to replace legacy infrastructure management solutions with ones that will enable an efficient cloud computing model. Our company is implementing ground-breaking technology that uniquely helps convert existing infrastructure in-place to a cost-effective cloud computing model but more importantly provides the backbone for managing a cloud-computing environment through its lifecycle. We're looking for $3-$4 million dollars of Series A financing to complete our core platform and rapidly bring it to market through a channel of established business partners."

  2. Business Problem To Solve

    A summary of why your business needs to exist. This is where you focus on the uniqueness of your solution including competitive contrast (a must have) and some specifics about how you go to market, including anything special about pricing or licensing strategies. A simple starting paragraph might be:

    "Existing solution vendors continue to struggle adapting their legacy architectures and licensing models to new trends in IT, making it difficult if not impossible for the CIO to continue to build modern cost-effective business services. In-place migration to a cloud computing model with our innovative usage-based licensed solution allows the CIO to both leverage the good components of what already exists with the new technologies needed to deliver excellence inexpensively to their customers. Working with technologies like VMware, HP and Cisco, our solution delivers on the promise of affordability, reliability and swiftness that IT has long been promising."

  3. Size the Market Opportunity

    This is where you are trying to attract the interest of the investor -- are you entering a market where your revenue potential over five years is $10 million or $100 million? Are there thousands of applicable customers or just a few dozen? Is this a global market opportunity or is your reach only regional? In this section you typically need to quote 3rd party sources to validate your claim to overall market size. An example might be:

    "IDC states that CIO's will spend $2.3B over the next five years to retool their IT infrastructure towards cloud computing models. They say the biggest need is to ease the transition from legacy solutions to the new breed approaches. Our solution addresses this need head on and should provide the Company with access to as high as 50% of the market opportunity over that period of time."

  4. Competitive Landscape

    An overview of the key competitive differentiators. The worst thing you can say is that you do not have competitors (see Competitive Analysis for more). Nine times out of ten the investor will tell you who they think the competitors are, why they think they already have a solution like yours (or could have one) and why what you say is not that special. Keep in mind the investor is often looking to compare you as part of you they assess potential value, give them someone to compare against. An example might be:

    "IBM continues to struggle embracing how the new technologies are coming together under a Cloud framework. Products like XXX are years way from delivering a next generation solution the CIO can count on, especially for modern IT architectures. Our approach to in-place cloud conversion along with how we bring together the salvageable components of existing management systems makes our solution the first to deliver something that can be implemented today. Our pricing model allows the CIO to implement our solution for the cost of the maintenance they pay on the incumbent technologies."

  5. Operating Plan Overview

    Just the highlights -- revenues, expenses, operating loss/gain, gross headcount and customer projections. As mentioned above, investors would look for a 5-year outlook (yes, lots of guess work involved). Find the right balance between aggressive business growth and absurd goals that show you do not understand anything about business. A sample chart might look like:

      Year 1 Year 2 Year 3 Year 4 Year 5
    Revenues $500,000 $2,000,000 $5,000,000 $12,000,000 $25,000,000
    Expenses $1,100,000 $2,400,000 $4,100,000 $8,000,000 $15,500,000
    Loss/Gain ($600,000) ($400,000) $900,000 $4,000,000 $9,500,000
    Cust/Year 25 80 143 300 500
    Headcount 12 20 42 100 175

  6. Management Team

    A critical summary of the management team. Highlight the one, two or three people who will provide the necessary development, sales and operational management experience needed to give credibility to the implementation of your plan. Focus on what experience they bring to the Company and if they have any special skills/experience relevant to the business problem at hand (e.g. was CIO at large multi-national), no need for a long job history though (keep everything brief). A sample team summary might be:

    "The management team is led by Henry Jones who has an extensive background in building IT management solutions. Mr. Jones spent over 10 years working both in IT organizations and also for mid-tier software development companies where he excelled at creating products with excellence.  He is considered an excellent manager with relevant operational experience. Sales is being managed by Barb Jason, who comes from primarily an enterprise background. Barb is familiar with building direct and indirect teams having worked for almost 10 years at companies like HP and Cisco. Development is headed up by Backtir Hamish who has a PhD in advanced systems design. Backtir has successfully scaled development teams to build and support complex management solutions and brings a variety of innovative development techniques that are being used to differentiate the company's lead solution."

  7. The Ask

    As for something -- why should someone read your document and then not know what you are asking for. Be specific about your needs and what you intend to do with the proceeds. A sample might be:

    "The Company is looking to raise $3-$4 million dollars in Series A financing from 1 or 2 investors who are familiar with businesses selling large scale IT management infrastructure solutions. The proceeds would be used to fund a 24-month runway for the company to complete its lead solution and build the initial path to market as a combination of Direct and Indirect sales models."

Practice will make near perfect. You might be passionate about the technology but be unable to talk comfortably about your business plan. Find a safe venue to present your plan a few times -- not just friends but some investors who will likely not be on your target list. The more you come across as confident in your plan, the better the chance someone will care to dig a bit deeper.

There are many 3rd party sources that can guide you towards how to write an effective business plan -- InsideSpin is one of them and can be used to review business plan drafts through Member Services. It's up to you to decide what sources to use.

Pitch Deck

If you have challenges creating a clear business plan document for investors, you will likely have more challenges creating a PowerPoint deck to pitch it. You will need some help from someone who has suitable graphical abilities and understands how to use tools like PowerPoint effectively. Some basic principless to keep in mind:

  1. Visualization (pictures) on each slide is better than words -- you can talk to charts and pictures much more confidently that you can read key points (anyone can read slides). You can also vary the message better as you hone the relevant messages.

  2. Mirror the business plan document -- start with a slide that grabs attention and follow on with slides that draw on the business plan summary. You will be pitching to the investor and other people on the investment team, so you can talk to more detail in the slides than you had in the written document.

  3. 30 minutes -- is about the time you should need to get through the presentation. You are far better off having a 30 minute presentation take 60 minutes because many questions are asked than come in with a 60 minute presentation to find out you only have 30 minutes to present it. There are various rules of thumb on how many slides you can fit into 30 minutes -- 10-15 is probably the right amount. Remember if questions are asked, interest is there -- silence is not golden in the investment game.

  4. Follow up -- find out where you stand as you go through the presentation. These presentations can be a time waster as many investors will use what you know to improve their overall market knowledge without actually intending to invest in your business. By the last slide, you should have some feeling of whether they are a prospect to continue with, or just a practice stop before your next candidate. They will also work quickly to tell you if they are in the game or not -- you should ask.

Again, practice will make near perfect. You might be passionate about the technology but be unable to talk comfortably about your business plan. It's not uncommon to be a poor presenter unless you have presented many times. Find a safe venue to practice presenting your pitch -- friends can be good for this but some investors who will likely not be on your target list are also good. The more you come across confident during your pitch, the better the chance someone will care to dig a bit deeper. Do NOT read your slides -- learn to talk concepts and ideas, have the key plan numbers, market opportunity metrics, etc in your head. Practice will make near perfect.

Some entrepreneurs have been known to exercise for a few weeks prior to doing a road show to pitch their proposal. The extra fitness helps with the tiring and repetitive nature of doing many presentations. If you are one of those always wanting to have a reason to get back to the gym, this would be it.

The Investment Circuit

Finding VC investment is generally a game of numbers. The more VC's you reach out to, the more meetings you are likely to have and the more chances to find money. You can either approach individual VC's or attend various investor conferences where young companies have a chance to pitch to an audience of VC's. The latter is obviously highly less focused but does make it easier to make contact with a bunch of people at once.

Given how time consuming (and possibly expensive) this process can be, you also have the choice of researching the VC community to find the candidates who have the profile you are looking for. In either case, it will take a lot of time away from other CEO activities, so use it all wisely.

Some good rules of thumb include:

  1. Look for VC's that invest in your stage of business -- some focus on early investments (Series A) and some focus on later stage investments. It's often the case that their web sites will say or a quick phone call can also find out.

  2. Look for VC's with portfolio companies that might be similar in nature to what you want to build -- not something competitive, but similar in market space, size, type of technology, partner ecosystem, etc. That will lead you to meet people who can better understand your value proposition. An investor wants to invest in something they have some experience with, not something that will seem all foreign to them.

  3. Look for great investment partners -- research the lead partners and find out who would be likely Board candidates. You want someone who can help the business succeed not block it through ignorance. Check on their backgrounds, look for people who can help fill the gaps in your own team, especially operational gaps. Sometimes the biggest benefit is the network of strategic partners a VC brings to the table -- opening doors you may not otherwise be able to open. Most of the big technology companies (Microsoft, IBM, HP, ...) meet with VC's regularly to understand the ecosystem of baby companies coming up (e.g. looking for strategic acquisition targets down the road).

Whether you choose the numbers game or select the few that match your criteria, you will learn a lot about yourself and your business plan by having these meetings. Investors will have no hesitation to tell you how bad your plan is, how many holes are in it, how many other companies are doing what you are doing (or could do it), how many gaps you have in your team -- it's a tough road with typically a handful of candidates who might go to the next steps. Don't forget many investors pay people to take every phone calls (or email inquiry) and take first meetings as they are playing the odds as well. It's not unusual to have 50 meetings before you find an investor who will take a few steps forward -- if you do some up front research, you can avoid many of the meetings that would lead nowhere (qualify your opportunity, just like a sales lead)..

As mentioned above, 3rd parties like Investment Bankers can help you develop the road show needed.

Term Sheets and Valuation

Most first time CEO's, especially those without prior finance or sales experience, would likely say this is the biggest mystery of the fund raising process. You manage to get through the qualification stage and an investor hands you a draft term sheet with a variety of negotiation points that you have no idea what they mean. The term sheet includes a proposed company value with a number that looks to be out of thin air. At this stage, you should have engaged an appropriate legal resource to help with the process from this point forward. Only choose someone who has experience with investment transactions with technology companies -- this is not a job for your family lawyer or tax accountant (or something you should do on your own). The things you agree to in a term sheet shape the future of your Company in many ways impact what you and the team hope to gain should a company sale of any kind happen years later.

The first three key elements in a typical term sheet are all tied together:

  1. The proposed amount of money to be invested. It's not always what you ask for, especially if the VC is looking to see a group of VC's come together to fund the round.
  2. The amount of ownership the VC is looking for. Always a shocker. Most first time entrepreneurs assume they would be giving up 10 or 20% of the Company only to find the VC asking between 75 and 90%.
  3. The proposed value of the Company. This is important as it relates to the math used for the above points. The value is normally based on the assumption the deal closes (e.g. you have the money in the bank so your Company value is at least as high as your corporate bank account). The term you might see is something like " on a fully-diluted basis the post-money valuation of the Company is $$". Once valuation is set, the share price is set for everyone.

If you can get through the above points, the rest of the term sheet is generally harmless in today's economy. During the 1990's and to some degree the first few years post-bubble period, term sheets were very complex with layers of preferential treatment for investment shares. This made figuring out the impact of a term sheet hard on many entrepreneurs. Fortunately the markets have settled down and sanity has returned for the most part.

The next key areas to understand in a typical term sheet talk about the structure and rights associated with the proposed investment:

  1. The rights associated with the shares allocated. Typically a new class of shares is created (Series A, Series B, ...) for each major investment as the rights associated with each investment are different than any previous investment. If nothing else, there is a voting and liquidation priority stated -- the general rule is the last money in earns rights to be the first money out.
  2. Existing share rights that need to change. If there are any existing shareholders, or classes of shares from prior investments, the term sheet would typically contain a statement about any amendments the new investor is looking to see made. Often this is geared towards cleaning up rights granted before than no longer apply or would prohibit the rights of the new money. It can cause consternation with existing investors if rights are being diminished -- often this is the case if the new money is being sought to buy time to correct some problems the company is experiencing (raise money when you don't need it).
  3. Stock option pool. It's not uncommon, and in some ways a statement of values, for the investor to define how they see the employee stock option pool set up. Here is where you put your stake in the ground around what ownership you want the team to have -- not just senior management, but all employees. Use a spreadsheet to work out various sale scenarios so that you can look yourself in the mirror years later when an exit occurs and it is being shared in a way you feel comfortable with. You can't change it at that point without lots of potential tax implications, if you can change it at all.
  4. The upside and downside conditions. Investors are excellent at maximizing both upside and downside situations. Downside rights usually talk about liquidation preferences -- the right to be first in line to take money from a sale or bankruptcy scenario. Upside tends to be more generous depending on the sale value -- very high values usually result in preferred shares converting to common shares so all shareholders are treated equally. Less high values might have a 1 or 2-times liquidation preference which means the investor takes their investment money out first and the remaining money is split equally. There are a lot of variations on this theme so make sure you understand it, or have someone help you work through different scenarios. Spreadsheet modeling works well to visualize what investors are asking for.
  5. Anti-dilution protection. Simple right that allows the investor to participate in any future round of investment at least to protect their relative share ownership. This means you can not cut an investor out of a future round of financing. It's a standard right that can also be problematic if a subsequent investor wants to push aside existing investors. More often than not, this right is a good one to see as it tends to encourage 'insiders' to participate pro rata in additional funding scenarios.
  6. Board structure. It's common to have a statement about how the Board would be structured. Lead investors will always want 1 or 2 seats on the Board, small investors may not be looking for this. You should always look for a Board structure that keeps a few seats open so you can bring in some in dependant Board members to keep your investor Board members on their toes.
  7. Various other rights. There is often a whole bunch of minor rights described that relate to sale events, long term rights to force public offering of shares, payment of dividends, etc. It's easy to disregard all of these as unimportant -- if you are planning to have a successful business, make sure you understand them all as they do often come into play. You don't want to loose control of your business years later because of something you agreed to in a term sheet at the start that you did not care about. The lawyer in the crowd might be the person to talk to at this stage.

Some other minor points you can find in a term sheet:

Last point is to ask for their due diligence list. The sooner you receive it and start working on the details, the sooner you move through to close the investment. Review the list carefully and decide how many items are essentially on hand and how many will take time to organize. The most onerous ones tend to be early client or partner references, etc as they need to be scheduled. If an investor does not have a ready due diligence list, this may mean they are unorganized and not able to close the investment in a reasonable time period.

Getting The Best Term Sheet

Sometimes the effort to get a term sheet is itself so onerous you forget to make sure to get the best one you can. Here are some negotiation themes to keep in mind to maximize your outcome:

Most investors are reasonable in the way they negotiate. The advantage they have is having done many, many deals prior to yours. They have a further advantage of having seen most of them go nowhere so they know how to protect the downside, sometimes more than properly share the upside. Get the right team of advisors around you during this phase so you can move through it with a positive (if tiring) experience.

Legal's, Due Diligence, Closing Process

Once you have agreed to the terms of the Term Sheet, the rest of the process is more tiring than anything. This is where lawyers get involved, representing all parties and start drafting long, long documents. The bulk of the time consuming part is divided between providing materials for due diligence and reviewing (arguing over) drafts of legal documents.

Due diligence can focus on many items including:

It's not uncommon to revisit certain parts of the term sheet as you go through the due diligence phase. If things are heading in a bad way, don't take an investment that will ruin your reason for wanting to start a business. Work together with the investor (and their lawyers) to get things back on the rails. You'll find that neither party wants to fail once the process started so work with them as a team not an enemy.

The legal documents will also have a variety of materials that cover representations and warrants which is where the "i promise to have told the truth and nothing but the truth" comes in. If you end up selling the Company later, this section expands into pages of truth statements.

The documents will also capture the details of the term sheet with specific focus on shareholder rights. These are very detailed and require professional assistance to get right.

Keep in mind the process of closing an investment is between the investor and the Company, not between the investor and you. You are representing the Company for certain items but the Company is its own entity at this stage. You might also want to engage a personal lawyer to review the items relevant for your role, such as a revised employment agreement or special terms and conditions for your ownership issues (if you have existing investors, they will probably want the same thing).

Assuming you get through all of this, the closing process is itself fairly easy -- a lengthy paper signing event (the lawyers manage this) followed by a wire transfer of funds into the Company bank account. You might have some closing day commitments like how much cash is on hand prior to closing, so make sure you keep some part of one eye on running the business through this stage so nothing can bite you at the end.

The funds normally come all at once unless otherwise agreed to. Print and frame the bank balance statement. Celebrate, get some rest and move on to running the business.

After Financing Priorities

You have your money, what do you do now? First thing is to make sure you actually have your money, don't make commitments to spend money until you see it in the company bank account. In the hey day of technology (the bubble period), you would spend 10% on a lavish party -- seems silly looking back. The priorities post financing generally fall into these areas (in order):

  1. Get some rest -- a typical round of financing, especially the first, is very tiring on those involved. If you are just starting your Company, it was probably almost all up to you. Take a few days, a week, whatever you need to recharge and get your head focused on the first business plan objectives (typically first customers or first version of product). Don't skip the step of rest, it will come back to bite you later.

  2. Firm up the first hires - you need to get the work train moving. You may already have some people in gear, so now is your best opportunity to fill in the gaps before things get busy again. The first few hires tend to be (in order):
    • first full-time sales resource (if product ready)
    • first marketing resource (start raising product awareness)
    • hire any needed additional developers
    • sales support engineer (SE) to help close first accounts
  3. Raise company profile - typically this is a time to start marketing the company and its brand. You may want to first announce the closing of the investment although this is not actually that important as you can tell all your customers and partners about it as you need to. Make sure your sales materials are ready to go and the web site says what you want to say. If all done properly, you are ready to let people know you exist. Keep a classic marketing adage in mind -- "sometimes all that good marketing does is tell more people how not ready you are for business", so make sure you are ready.

  4. Validate the value proposition of your solution - which really means get your first 5 customers. Once you enter this phase of the business, you are best served by having everyone work 100% on this achievement. Once validated, it opens up many other doors for you, including industry analyst contacts, referencable press releases (with 3rd party quotes) but most importantly, validates for your investors that they made a good choice. A huge mistake made at this point is to get defocused on trying to reach the goals for the year all in the first three months -- you take on too many leads, you want to tell everyone how good things are going, you're traveling to far away places, etc. Focus, focus, focus -- it will be worth it.

Once the value proposition is validated, you are ready to establish sales momentum. Marketing gets turned on to generate leads, event commitments are made, web seminars are scheduled, sales expands to process the leads, the next software version is planned and the business falls back into traditional operational priorities. You are now ready to reach the first year goals in your business plan (although you were probably too optimistic, so many of them carry over into year two! Don't worry though, that's normal).

Subsequent Financing

If additional financing is required (because revenues aren't enough to support the required headcount growth or marketing spend), the most important factor tends to be company valuation. If you have been doing a good job validating your business plan, achieving goals and earning marketing ownership, your valuation is on the rise -- you can raise more money giving up less of the Company than during your first round of financing. If goals have not been met, or overall market (economy) conditions are down, valuation may be down with it -- so money is more expensive in terms of share ownership.

Either way, you are into a bit of a numbers game at this stage. You should be well versed on the various aspects of pitching the business plan, your management team is, your product or products are, your customers are, your revenues are -- there are many more facts about your business that are undeniable (no fooling allowed). Investor focus shifts to look at what stage you are at relative to the market opportunity to decide if they want to support moving forward.

Given this stage analysis, you may want to seek out additional VC's (versus raise money only from within) so that you can pick up additional expertise to deal with the next set of growth challenges. Some VC's focus on high growth stages and often bring with them a team of people that can help operationalize fast growth processes across primarily sales and marketing. Your existing VC's might not be happy with this approach as they would prefer to retain their relative share of ownership (the "pro rata" term applies) and raise the money internally. This gets you the money but may create a needs gap between your Board (usually made up of investors) and the stage of business. You might have to use CEO courage to get what you need here (assuming you want a value-add Board) -- it can be a tough play, if valuations are up, you should act as though you are in the driver seat.

If your need for more money is not related to the next stage of growth, it likely means you have not achieved your first set of business plan goals. More money is required to survive while those goals continue to be pursued. Taking money from existing investors works best here as there is little change in relative share ownership.

The last thought draws in the discussion of whether or not the business should continue at all. If you are struggling to raise money, cash burn is chewing up what is left from the first round, you might need to explore more desperate measures including debt financing (very expensive on both ownership and personal liability), selling the Company, or walking away from the opportunity to pursue something else. If you are in this scenario, the likelihood is your VC's are really in control of the decision. Address it with a high level of professionalism so that you can fight another day.

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