For successful fundraising, entrepreneurs need to ask themselves the right questions :
- Is my startup eligible to raise money ? Indeed, the entrepreneur must have the ambition to build a great company and a solid project. The market size must be greater than 1 billion euros. The startup must be innovative and scalable.
- Is it the right time to raise funds ? The best time is when the startup is already making revenues and has some money left in its coffers.
- Do I need to be accompanied by a fundraiser ? It depends on the situation of the startup but if the founders do not have a network of investors and lack time then yes, it is better to be accompanied by a fundraiser.
- What are the investor documents to prepare ? A pitch deck, a teaser and a financial forecast.
- How to select investors ? First of all, you have to determine the stage of development of your startup to know if you are addressing business angels networks or investment funds. Then, you have to look for the sectors of interest of the investors and find an original way to approach them other than by email.
- How should I prepare for my investor meetings ? Entrepreneurs must learn their pitch and know everything about their sector of activity.
- Once all these steps have been completed, all that remains is the drafting of letters of intent, due diligence (audit of the startup) and the signing of the shareholders’ agreement (accompanied by a lawyer).
- Finally, a bank loan can accompany successful fundraising.
For more details, please read the article below.
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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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Below is the path that entrepreneurs must take to successfully raise funds.
Ask yourself questions about your startup’s eligibility for fundraising
- Does the entrepreneur want to develop a large or small business ? If it is a small business, then capital dilution may not be the solution. On the other hand, developing a large business requires more financial means, the goal being to develop as quickly as possible in order to become the leader on its market.
- Is the entrepreneur in a large or small market ? A good market size starts from 1 billion euros.
- Is the startup innovative ? The entrepreneur must present himself to investors with a product or service that will dust off an old industry or bring a significant improvement to what already exists.
- Is the startup scalable ? Can it increase its revenue while achieving economies of scale ?
These questions allow the entrepreneur to start the fundraising adventure on the right footing.
The question of timing : Is it the right time for fundraising ?
- The right time for a startup is when it has proven its ability to execute, when it has sold its products or services to its first customers and when it is generating revenues, however small.
- Entrepreneurs must anticipate their financing needs. Indeed, one should not wait until there is no more money in the company’s accounts but rather anticipate the fund raising 6 to 8 months before the end of the cash in the company.
Thus, the question of timing is also very important.
To be accompanied by a fundraiser ?
- The accompaniment by a fundraiser is not an obligation but according to Pascal Mercier, co-founder and associate director of Aelios Finance: “More than 50% of deals are done through fundraisers. Indeed, fundraisers master the language of investors, your file has a better chance of being on the top of the pile of investor files.
- To approach fundraisers, a simple presentation of the startup is sufficient. They will take care of the financial documentation and look for the right investors.
- If you don’t choose to have a fundraiser accompany you, then it is advisable to put one person in charge full time on the fundraising while the rest of the team stays focused on the daily execution to maintain the company’s metrics. This person will draft all financial documents and be the point person between the startup and the investors.
Prepare presentation materials for fundraisers.
The investor documents include:
- A pitch deck that includes about 30 slides. This is the document that investors rely on to make their final decision. It must show : The problem, the solution, the size of the market, the competitive analysis, the comparative advantage, the business model, the technologies used, the business and financial assumptions, the team and the breakdown of the financing needs.
- A teaser : This is a slimmed down version of the pitch deck of about 15 pages. This document will be used during initial discussions with potential financial partners and investors.
- A 5-year financial forecast that includes a projected income statement and balance sheet, a financing plan and monthly cash-flow statements.
These documents must be dreamy, yet real, and reassure investors by showing them that the entrepreneur and his team know how to execute and understand the business they are working on.
Selecting investors to approach
Depending on the stage of development of the startup and the need for financing, it will be necessary to approach either business angels or investment funds.
When selecting investors, the entrepreneur should keep two things in mind :
- The investors have sectors of predilection. Thus, it is necessary to know who to approach according to the core business of the startup. For example, the investment fund Sofinnova Partners focuses on companies in the life sciences sector, while IDInvest Partners invests in companies specialized in new information technologies.
- Investors finance few projects per year. For example, Partech, a Franco-American investment fund, receives 1,000 deals per year and closes 2 deals per year for tickets in the millions of euros. Kima Ventures, a business angels fund created by Xavier Niel, receives 500 applications per week and invests in 100 startups per year for tickets of 150 000€ on average.
Therefore, sending emails is not enough because investors receive about 50 in a day. What makes the difference is to find the addresses and meet the investors or their associates, to go to meetings or investor events or to pick up the phone to call them.
Finally, don’t hesitate to take the time to select the right investors, knowing that they will be part of the board of directors for at least 4 years. It is therefore important that there be courteous exchanges from the beginning of the entrepreneur-investor relationship.
Preparing for investor meetings
The first meeting lasts about 1h30. The entrepreneur will present his documents without going into too much detail about the figures. The goal of the first meeting is to make the investor understand the business in simple words. Indeed, the latter will gauge the viability of the business and the strength of the team. He will also have to re-explain what he has understood to his partners. Thus, the entrepreneur must know his subject by heart and remain as natural as possible in the hope of obtaining a second meeting.
The following meetings will allow to get into the details of the figures, the valuation, the commercial and financial strategy. Investors will also want to meet all the key people in the team. Thus, all team members must be prepared and master the pitch.
Prepare for the due diligence period
Once the investor meetings are over, letters of intent will be signed and the due diligence period will begin. During the due diligence, it is advisable to be reactive and to quickly send the requested documents that will be audited.
Prepare a bank loan in parallel
Once the due diligence is completed, the shareholders’ agreement will be drafted and signed. It is advisable to be accompanied by a lawyer for this legal part. This is how the fundraising is concluded. However, the entrepreneur and his team can go a little further by using the leverage effect. Indeed, as the equity capital increases, the startup can go into debt up to the amount of the fundraising. Thus, in parallel to the fund raising, it can be interesting to start the steps for a bank loan.
The path to successful fundraising should now be clearer. Also, the entrepreneur should not forget that he and the investor are on equal footing. Indeed, he offers an opportunity to an investor and the investor offers the entrepreneur the possibility to go faster in his development. Thus, it is necessary to take care that the pact of partners is balanced and that neither of the two parties feel injured.
Finally, the entrepreneur must remember his responsibility to use the investors’ money wisely and to think about their exit so that the relationship of trust lasts and that the investor continues to finance the startup during the next rounds.
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