In this article, you will understand the chronology of the fundraising process in 5 steps and we will answer the question « How to raise funds » :
- The realization of the investor documentation : the business plan (Excel format) and the pitch deck (PPT format).
- The choice of potential investors (VC funds, Corporate Venture, business angels…) according to their specialization or their preference in terms of business sectors.
- The due diligence phase where we audit the financial and legal documents, the management team, the environment (customers, partners, competitors), the research and development needs as well as the commercial strategy (branding, marketing, sales) of the startup.
- Negotiation of the letters of intent and the shareholders’ agreement.
- The closing phase with the signature of the shareholder agreement that certifies the success of the fundraising process.
Advimotion is a financial advisory firm that assists startups and SMEs in obtaining non-dilutive financing and equity fundraising. We also act as advisors in corporate divestiture transactions to best represent the interests of sellers.
We offer strategic consulting and outsourced CFO services to ensure the financial and operational monitoring of your business. Finally, we take care of the drafting of investor documentation : business plan, pitch deck, creation of reporting files and valuation calculations.
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When you start a business, the need for financing or cash-flow can arise quickly. Raising funds then becomes a major concern for entrepreneurs, and sometimes as soon as the startup is created. In the seed stage, startups need to finance the prototype, the Minimum Viable Product (MVP) and the market test phase of the product/service. In the pre-Series A phase, when traction begins to build, entrepreneurs need to fund their larger scale deployment. Beyond Series A, fundraising is used to finance the growth and internationalization of startups.
Raising funds is a long and demanding process for which one must be prepared. Indeed, whether you want to raise €250,000 or €2 millions, the processes that entrepreneurs go through and the deadlines for raising funds are the same.
Definition of fund raising
The fund raising is a legal and financial process which allows to bring external capital to a company thanks to the intervention of new investors. The founders then obtain financing in line with their ambitions while retaining the majority of the capital and voting rights. A trade-off between the amount to be raised and the valuation is made because the higher the valuation of the company, the less dilutive the operation will be.
Several valuation techniques can be used: sales multiples, EBITDA, DCF, taking into account intangible assets, etc.
Raising funds allows you to surround yourself with investors who will also provide advice. We can then talk about “smart money”. The active aspect of the investor is a data to be taken into account when one wonders how to raise funds.
How to raise funds in 5 steps
1 – Build a solid and efficient financial documentation
The financial documentation includes the business plan and the pitch deck.
- The business plan must be built according to realistic business assumptions and in line with market standards. It includes a projected income statement, a financing plan and a monthly cash-flow statement. It is from this document that investors gain an overall view of what has been achieved so far. They also see the company’s growth potential. The business plan must be ambitious and pragmatic.
- For the pitch deck, substance is as important as form. The content includes a presentation of the company’s activity, its business model, its activity indicators, the team, the strategic advice as well as a financial part. In PowerPoint format with precise and non-technical terms, this document must be attractive. The investors’ decision making is based on the pitch deck.
For the first contacts, it is interesting to write a teaser (a lighter version of the pitch deck). The disclosure of information must be progressive.
2 – Contacting investors of interest
The strategy for contacting investors can be twofold. There is a quantitative strategy which consists in contacting all the investors and investment funds in the market. There is also a qualitative strategy which consists in contacting only the funds or investors specialized in your field.
However, it is recommended to target investors showing a strong interest for startups in your sector of activity. Indeed, in order to reduce the risk, the financiers invest mainly in the sectors for which they have more knowledge. Thus, the entrepreneur must do his own research on all the investment funds in the market. The best answer to the question of how to raise funds is therefore, in our opinion, a mix of both with a rather qualitative approach.
It is better to delegate this task to a fundraiser. Moreover, the objective is to exclude investors who have participated in the fundraising of a competing company. Chances are, the shareholders’ agreement will contain a non-compete clause. Even if this is not the case, it raises a conflict of interest issue.
Following a positive response from an investment fund, a letter of intent is negotiated and signed before starting the due diligence phase.
We will first discuss the due diligence phase because the negotiation phase concerns both the letters of intent and the shareholders’ agreement.
3 – The due diligence phase
What is due diligence ? The due diligence stage occurs when the start-up has succeeded in attracting the attention of investors. Business indicators, financial elements and legal documents will be audited. At this stage, it is important to be responsive to requests for information. During the due diligence process, the soundness of the business plan and the company’s organization will be put to the test. Indeed, 6 key points will be examined :
- The financial health of the startup. Thanks to the due diligence, the investors will be able to compare the information entered in the business plan and the information analyzed by the audit firm. The goal is to identify the main expense items, the need for financing, the capital structure, etc. There is also a purely administrative analysis of the social and fiscal documents.
- The legal health of the startup. Here, the main legal documents of the startup are audited. These include the minutes of the general meeting and any disputes.
- Research and development needs. The R&D policy of the startup is observed to identify the needs and verify the coherence of the costs.
- The management team. Investors need to know everything about the founders in order to assess the sustainability of the startup.
- The environment. Understand the target customers, direct and indirect competitors, and current and potential partners.
- The business strategy. Here the branding, marketing and sales of the startup are audited to estimate the growth potential.
4 – Letter of intent negotiations
An important document is negotiated and written during this phase. It is the letter of intent (or L.O.I.).
The letter of intent sets out the financial and legal terms of the investors’ capital contribution. It can be an investment subject to conditions precedent, such as the assurance that there are no insurmountable points arising during the due diligence phase described above.
The shareholders’ agreement is a legal document containing the commitments of the founder-investor couple. The earlier the letter of intent is negotiated, the easier it will be to negotiate the shareholders’ agreement.
It is essential to be accompanied by a lawyer for these two documents. The costs incurred may seem significant but are negligible in the face of a potential error.
5 – The legal closing
The legal closing is the last step of the fundraising process. It is the signing of the shareholder agreement.
When the parties agree on the conditions of the fundraising, the operation can “materially” take place. For a classic fund raising, shareholders and investors meet in an extraordinary general meeting during which the decision to carry out the operation will be voted.
It is possible that the operation can be carried out in a lighter way without convening a general meeting thanks to financial instruments such as Air warrants.
How to raise funds – conclusion
As we have just described, raising funds is a time-consuming, technical and demanding process. Therefore, to be accompanied by a consulting firm specialized in fundraising such as Advimotion is very useful for an entrepreneur.
Do you need support to organize a fundraising event ? The Advimotion team is available to provide you with additional information on how to raise funds.
Advimotion, your growth partner.