Advice for founders and CEOs is to consider raising capital when the startup reaches the threshold of approx 12 months runway (Runway is the estimated time remaining for a startup before it uses up all its available money). Because not every time a startup needs money, investors will give money, but you will need a fairly long period of time to find investors, convince them, and carry out the necessary procedures to receive investment, before the business's account reaches 0 cents.
This guideline will help startups have a systematic and effective preparation process for each round of capital raising.
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6 - 12 MONTHS BEFORE CALLING FOR CAPITAL
Understand business indicators and capital calling needs
Map out and track these business index important to your business (reference 12 important measurement indicators). Of course, every business has countless indicators, but you need to clearly determine: for your business model, what are the most important indicators, what are the indicators that show growth, and development potential.
Illustration photo. Source: Internet
Understanding business indicators will help startups, and potential investors, identify their current problems/needs, thereby planning what to do in the near future and the amount of capital to call. For example: From business results in recent months, user retention rate shows that your product is meeting user needs quite well, but the number of users is low, leading to customer acquisition problems in the near future. Also from past data, you can calculate the CAC (Customer Acquisition Cost) of $0.5, from there with the goal of reaching 500,000 paid users in the next 6 months, you can estimate the amount of capital needed to call for the customer acquisition goal of $250,000.
➤ Learn more about CAC calculations in the article: How to calculate Customer Acquisition Cost correctly?
Aggregating those indicators into a Data room will also help investors more easily grasp the startup's current business situation. The data in the Data room also needs to be filtered, focusing on the most key indicators, avoiding cramming too many unimportant data to send to investors. In addition, if the Data room has Excel files or Spreadsheets with many calculations, especially business estimates, make sure you clearly show the calculation formula in there, not just copy & paste the numbers.
Implementing these notes well not only helps you show investors that you clearly understand what is most important in the company's business model, but also makes it much more convenient for investors in the appraisal process.
Determine the amount of capital needed to call, and contingency plans
From future growth KPIs and past cost figures, create a financial projection in the next 1-2 years, and estimate how much more money you need. Normally, startups often raise enough capital to last until the next round of funding.
Besides, you also need to plan in advance what you will do if you cannot raise capital. Until the money runs out, will the business be able to make a profit, or will you borrow capital? Do your backup plans buy enough time for you to improve your business to convince investors to invest? Always prepare for the worst case scenario.
Talk about itwith current investors
Investors in your startup in previous rounds will likely have useful advice on choosing the right investor, acting as an introduction bridge, supporting appraisal, and supporting you when calling for capital. You also need to talk and gain consensus from these investors about your upcoming capital raising plan, and you can absolutely invite them to continue investing in the upcoming investment round.
Calculate Company Valuation and Cap Table
During the capital raising process, many investors will ask you how much capital you need to raise in exchange for what percentage of shares. To prepare well for this question, you need to estimate your company's valuation in advance. Please refer to the article 5 commonly used business valuation methods To estimate the value of your business.
What needs to be done after having a valuation is calculation Cap Table (summary table of information and analysis on percentage of shares, value of shares, amount of capital invested through rounds of a company), and calculate how many shares you have left after this funding round.
Cap Table illustration. Photo source: Internet
And of course, don't forget to discuss these with existing investors. They can provide a lot of useful advice to help you determine the most suitable valuation, along with an appropriate capital raising strategy and investment structure.
Prepare Pitch Deck
One of the most important documents in the capital raising process is the Pitch Deck, a document that summarizes the most general and core information in that startup's capital raising round. first impression for startups to impress investors.
Opening slide in Pitch Deck of AirBed&Breakfast (old name of Airbnb) in Seed funding round.
A basic pitch deck usually has the following contents:
➤ Business information: Name, logo, field, general introduction
➤ Market issues
➤ Solutions you provide
➤ Traction: Measurements that indicate Product-Market Fit or the potential to achieve Product-Market Fit
➤ Market: Which market do you target? Is it big enough now, or will it be big enough in the future?
➤ Competitors: Who is competing with you? And in what way are you better than them?
➤ Vision: How will your business grow in the future? And how to achieve that?
➤ Team: How capable is your team to realize the above vision?
➤ Capital use plan: How much capital do you raise? How will capital be used?
Startups will often have tons of content to put in their pitch deck, and it's your job to choose which content. Note that the pitch deck is a tool for investors to have an overview of the startup's product and business model, along with the startup's potential, so in addition to the introductory information, highlight content that shows that the startup can succeed and is on track to achieve that success: market potential, team capacity, traction and growth rate,...
Mr. Hoang Duc Minh, Senior Coach of ThinkZone, guides how to build an effective Pitch Deck.
Complete your presentation
Usually, you will from 30 minutes to 1 hour to present and argue during the first meeting with investors. Practice pitching many times, get feedback from people around you and perfect it to have a good pitch.
Investors are extremely interested in the vision and motivation of the founding team. Tell an inspiring story about why you founded the company, the value you want to create, the vision for the business in the future, and the determination and ability of the business to achieve that vision.
Masayoshi Son, president of Softbank, decided to invest 20 million USD in Jack Ma's Alibaba after only a 10-minute meeting. Son said that although Jack Ma did not actively persuade Son to invest money, and did not have a business plan at all; however, he has one "fierce fighting spirit", passion and belief that the Internet can change China. "Jack Ma is the only person with bright eyes and it has captured my heart", Son recalls.
Make a list of potential investors
Do your research and make a list of investors with investment appetite (investment scale, fields of interest, investment stage,...) suitable for your startup.
Again, you should talk to current investors to ask for feedback on new investors who may be suitable for your startup, and the appropriate approach. Many times, you can ask current investors to act as introducers for new funds, increasing the startup's reputation and position when negotiating with funds.
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WHEN YOU START CALLING FOR CAPITAL
How does a capital raising process usually take place?
Usually you will start by contacting the funds on your list to make an appointment to meet. This will be the meeting where you send your Pitch Deck and pitch overview of the startup and investment opportunity. Don't forget to ask for contact so you can easily contact the fund's representative.
After that first meeting, the fund will usually discuss internally for a preliminary assessment, a process that usually lasts 1-2 weeks. If the fund is interested, you will receive a checklist of the content/data the fund needs to evaluate the startup more clearly. This is the time when you can sign the NDA (Non-disclosure Agreement), submit the Data Room you have prepared to the fund and go into the appraisal process.
Throughout the appraisal process, the fund will continuously ask more carefully about the product, technology, business results, team,... to evaluate the startup's potential and valuation in the most comprehensive way. Be prepared for a few more meetings during this time.
After 1-2 months, the fund and startup will negotiate to close the offer and make a final decision on whether to cooperate in investing or not. If the deal is closed, both sides will proceed with it Term Sheet and other investment procedures.
Continuously improve the pitch
Every time you pitch to investors, observe their attitude, what parts they are most interested in, what parts they are most skeptical about, then learn from experience to perfect your pitch.
Attitude when calling for capital
Always avoid the "need to get to the point of desperation" mentality. It should be noted that investing is not a process with only one value dimension (investors create value for startups), whose value comes from both ends (Startups also offer divestment opportunities and big profits for investors). So keep a steady mind when talking to investors, don't let the "underdog" mentality take over.
In many cases, investors will want to lower the company's valuation to increase the number of shares they own. This is a negotiation problem, but it's always best to keep clear in mind the reasons why you set your valuation, to protect the value of the company and your own shares.
Reach many investors at once
Talking to multiple funds at the same time will give the startup a negotiating advantage, and also increase the likelihood that the startup will find a more suitable investor.
Create a feeling of urgency
By setting a specific time limit for your capital raising round, you will create a sense of urgency for investors, forcing them to speed up their decision-making process. This is especially effective if the startup already has a few investors making offers, then the time limit will put pressure on other investors to "lose space", causing them to make offers faster, and often those are beneficial offers for the startup.
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TERM SHEET AND END OF THE CAPITAL CALLING PROCESS
Notice to all investors
If there is an established investor Term sheets with you, communicate that to the remaining investors you are raising capital for. This will put pressure on the remaining investors, urging them to speed up the negotiation process before you complete the capital call with a party other than them. (if they really want to invest in you).
However, in many cases, you should not disclose the name of the investor who created the Term sheet, to avoid investors talking to each other and "negotiating" with each other to make an unfavorable offer for you.
Make sure you clearly understand what the Term sheet says
When considering the terms of your term sheet, try to consider the responsibilities, obligations, or conditions entailed, and how they may impact the startup, both now and in the future. Only when you clearly understand these things can you confidently sign the term sheet and avoid future risks.
Complete investment procedures
After the Term sheet, you and your investors will need to complete some additional procedures SHA (Shareholder Agreements), procedures for establishing a company in Singapore (if any),...
At the end of the capital raising process, the startup is considered to have "more oxygen to breathe", and your job now is nothing more than to go back to work.