If you are reading this, I believe you would have already read through Part 1 and now know the importance of hiring a good lawyer, the basics of a financial model and key documents which can go in the data room in addition to some other fundraising tricks.
After the quick pit-stop, let’s resume my unsolicited (but, hopefully, welcome) monologue, starting with marketing materials.
Marketing materials for fundraising
There are several types of marketing materials used in a fundraising process. Here are the major archetypes:
- Teaser: five to 10 pages are used to entice investors to a pitch and further interact with the company.
- Pitch deck: 10–25 pages, is used for the company’s first formal pitch to investors and is often key to whether the initial interest will sustain and progress into tangible intent to proceed.
- Information memorandum (IM), 40–60 pages, together with the financial model and basic due diligence materials, are required to provide sufficient information for the investor to evaluate the opportunity and provide a Term Sheet.
I suggest build out the pitch deck first as it is more intuitive and summarise it for a Teaser and only, if required, provide more detail to make it an IM — IMs are more suited for larger fundraises and are increasingly being replaced by pitch decks (with a few additional slides).
Minimalistic materials do significantly better than text-heavy and cluttered materials. You aim to create a positive visceral gut reaction as the gut is where the decision is really made. The mind, the laggard it is, will unconsciously look for data/confirmation of what the gut has already decided.
Here are some quick tips:
- Use pictures, graphics, and charts to illustrate the opportunity as much as possible.
- Short, sharp, and conversational. As Winston Churchill once said, “let us not shrink from using the short expressive phrase, even if it’s conversational”.
- Try to alternate between emotional (qualitative) and factual slides.
- Share real benefits being delivered versus overly focusing on the features. People care about how you’re creating value for your users, not just what you’re using to do it.
- Aesthetics, can’t be stressed enough, make it easy on the eyes, less cluttered and pleasant-looking — it will go a long way.
Outreach strategy. Market of one
“I learned the most important rule of raising money privately: Look for a market of one. You only need one investor to say yes, so it’s best to ignore the other thirty who say no.” – Ben Horowitz.
It’s been seven years since Ben Horowitz wrote that in his book Hard Things About Hard Things, and it still stands true as ever.
When it comes to fundraising, all you need is the one champion investor who will lead the round and build conviction for others to follow.
Sure, you will have to kiss many frogs before you find your prince, but the aim is to sift through the frogs quickly. Let’s explore some concepts.
- Go big when building the investor list using any sources available to you spanning online databases, news articles, industry reports and friends in the industry (this would also help in introductions later down the road);
- Now that you’ve got a comprehensive list of investors, ruthlessly tier each investor, i.e.,the likelihood of investment based on their past investment, preferred sector, cheque size, and focus geography;
- While the most intuitive approach may be to reach out to the tier one’s first, let me propose an alternative strategy — for the first wave, reach out and pitch to 10–15 investors who are unlikely to invest and don’t know you from before — this will help you to iterate in real-time to lock your pitch down plus offer lesser false positives;
- In terms of the investor feedback you receive, any single investor’s feedback may be highly useful or complete rubbish, so you want to look for the patterns of feedback, even down to determining what you need to explain or outline better — you won’t get multiple shots at an investor, so hearing from some of the early pitches that you need, as an example, to better explain how your revenue model works, or why your customers need your product is vitally important;
- Once the first wave at Normandy has been hit, then you rely on the age-old adages — quality > quantity and activity != progress — while it is a great sign that many investors want to speak with you and you’re spending a lot of time on pitches, but it does not necessarily mean you’re getting closer — instead, leverage on the interest and get closer to finding your champion investor by focusing your efforts on the tier one investors;
- First, always try to find a common connection and ask for an introduction when reaching out to an investor. This is a warm introduction and warmer, yet if you can get an introduction from your shareholder or a fellow founder — no warm or warmer? — then you hustle still to get an introduction, and only when you fail, do a cold outreach;
- Constant visibility is good, and you should continue to engage directly or indirectly through different avenues (LinkedIn, Twitter, Newsletter, Business Updates via Email) — sometimes you catch people at the wrong time, and you want to maintain mindshare to capture situations where investors have gone silent or are slow to respond; lastly.
- Maintain a negative list of investors, which could comprise of your competitors’ investors, timewasters, or even strategics competing directly with you — negative does not necessarily exclude these investors from outreach. Still, it is a marker so that you can be more thoughtful about the approach.
Pitch. It’s showtime!
With the outreach strategy locked in and everything else in place, it’s time to sing your song. In this section, we will cover off-pitch flow, basic mechanics, and some common etiquettes.
Pitch flow and content
- Company’s overarching purpose
- Market dynamics which have opened up a substantial opportunity
- How does this translate for your customer in terms of opportunity or pain points
- Description of products and solutions uniquely solving these pain points, i.e. value creation
- How do you capture the value for yourself, i.e. business model
- Is this evidenced by customer adoption and current traction
- What would you have built-in five or ten years if all goes to plan not only in terms of size and metrics but also impact and market position
- Market size and why you will win against your competitors, and lastly
- Do you have the team to win, i.e. product-market-founder fit and intricate understanding of the market
- Sprezzatura or Studied carelessness means you have to put in more effort to make something appear effortless — effortless and elegant pitches are often the results of a large volume of effortful and gritty practice, so practice, practice and practice, and then maybe practice some more.
- Know your audience — do background research on the investor and the specific person beforehand so you can customise your pitch accordingly.
- Crowd balance — make sure not to overcrowd the call on your side, especially if it’s the first pitch, by only inviting people who are active participants but try not to exceed the other side.
- Get basics out of the way — send the deck ahead of the meeting so the person can familiarise themselves with basics enabling you to have a deeper discussion.
- Time management — Ideally, you pitch for 30–45 minutes, then leave time for Q&A and next steps. However, you are likely to be interrupted during your pitch with questions, and that’s okay — manage your time and cover the main points. Remember, the objective of the first pitch is to deliver a second meeting and not an endless sermon.
Etiquettes/Questions to ask
- Ask how much time you have, don’t assume — increasingly, you’ve got people running 30/45-minute meetings instead of the standard 60 minutes (probably after reading a productivity hack on Twitter);
- Ask for a brief background on the firm and person — you might learn something which you missed or wasn’t there from your background research since everything is not public when it comes to private investors;
- Announce the intended agenda upfront, ask if they read the deck, how much they know about the industry and any specific areas they want to focus on;
- In the end, once you’ve covered your process, ask about the investor’s internal process and typical timeline — agree on the next steps and follow up at an appropriate time.
You probably have a list in your mind already. A list of questions has been asked to you about your company so many times that the answer rolls of your tongue or your fingers can type it themselves. Convert this list into a FAQ document.
Keep on adding to the list as you go through the pitches, fundraising conversations and informal chats. Do fortnightly releases of the updated Q&A via the data room.
It may seem tedious at first, but it gets the basics out of the way, saves everyone’s time, gives confidence to investors and creates the spectre of competitive tension.
Resources, databases and tech tools
There are several resources, databases, and tech tools you can leverage to make the fundraising process more efficient, spanning across investor selection, sector intelligence, investor tracking, due diligence process management, financial information and valuation support, cap table management and legal document templates.
- Investor selection and sector intelligence (1): Trackxn, Crunchbase, Pitchbook and Capital IQ are some of the database platforms to use when building the initial investor list — the first two being more bang for the buck and suitable for early stage fundraises
- Investor selection and sector intelligence (2): e27, Tech In Asia, The Ken, DealStreetAsia, initially started as news portals, are now churning out some high-quality research — these are highly affordable, and you should have a subscription to these anyway
- Project management and investor tracking: Asana, Monday and Trello are some examples of project management tools that you can customise to track the progress of the preparation phase and marketing (investor) outreach space — they all have plugins to commonly used applications (e.g. Outlook, Slack)
- Document tracking: DocSend and HubSpot let you track documents sent via email — primarily applicable for when you send Teasers/Pitch Decks
- Due diligence process management and Virtual Data Room (VDR): A specialised VDR allows you to set different levels of permissions for each investor, track the data room activity in detail, encrypt your documents and disable them even if it’s taken offline and allow Q&A via the platform — Ansarada, Datasite, and iDeals are some options for this
- Financial information and valuations: Capital IQ and Pitchbook are the best-in-class when it comes to financial data for relevant public companies. VentureCapInsights, relatively new and limited regional coverage, is increasingly becoming a reliable source for private company data.
- Cap table management: Carta and Qapita are examples of some cap table management software solutions available to manage your cap table, ESOPs and valuation effectively
- Templates: Y Combinator, Index Ventures, and Kindrik Partners offer some high-quality document templates related to transaction documents in addition to guidance on various fundraising related matters
Like most tools, whether productivity, project management, research or templates — use it to serve you, not to serve it.
Every company will have different needs, so the right size of the offering per your need, and as long as these tools help you save time and work more intelligently, they have served a purpose.
Super angels are the individuals you want to invite to become shareholders in your company. Why? Early on in your start-up life— you need seasoned advice, market validation and network.
The advice can be wide-ranging, e.g. business model (how to charge customers), human capital development (how to retain and incentivise employees) or regulatory (how to engage with the government).
Having well known and reputable individuals as shareholders makes for a great signalling effect that gives you instant market validation, especially when you are a first-time founder and relatively unknown commodity to the investors and larger community.
Similarly, these Super angels bring with them a solid network and “cut-que access” to potential investors, partners, and employees.
Some examples of Super angels include partners in venture capital funds, senior executives at large corporates, key employees of big tech companies, superstar founders who have built unicorns, and fellow founders running complementary startups.
While Super Angels, as the name suggests, predominantly invest in angel rounds — they are increasingly investing alongside institutional investors even in later stages.
Bukukas, a fintech startup focused on digitizing Indonesia’s small businesses, has executed an impressive Super Angel strategy by cornering senior executives of larger fintech and founders of regional startups.
Term sheet, transaction documents and closing
A term sheet is a non-binding document outlining key terms of investment to enter into binding legal documents subject to certain approvals, procedures and checks.
What are key terms to look out for? What happens between signing a term sheet to signing a legal document, and what are the key legal documents?
Let’s cover, at a high level, key economic terms to look out for in a preferred equity round:
- Right upfront, you would find the valuation stated something like “…at a pre-money valuation of US$20 million on a fully diluted basis with a price per share of US$0.3”. Pre-money is the valuation at which the investors value your company on an “as-is basis” (before their investment goes in), and a fully diluted basis means all shares if all options, warrants and convertible debt were converted to equity.
- Preferred shareholders can usually elect to convert their holding to ordinary shares at any time or can have it automatically converted to ordinary shares at the time of a qualified public offering (IPO) — definition of qualified is outlined in the term sheet (e.g. the market cap of at least $US100 million). This is fairly normal, and there is no push back required (or expected) from you but the point to remember is that the preferred shareholders can convert their holding at any time to ordinary shares.
- Liquidation preference and participation is probably the most important term after valuation to look out for “1.0x and Pro-Rata Participation with Ordinary Shares”. It means that preferred shareholders have priority to be paid back their initial investment (or more) first over ordinary shareholders (and previous round’s preferred shareholders) in case of a liquidity event such as a trade sale, merger or liquidation on winding down. In the given example, participating preferred shareholders get to participate proportionately with the ordinary shareholders in the proceeds from the liquidity event after they have got their initial investment (or more). This is when it gets tricky and onerous for ordinary shareholders like yourself and your early backers. In a nutshell, change the “and” to “or”; do anything you can to avoid the “double-dipping” scenario. As mentioned previously, precedence means everything when setting terms, so negotiate well from the start (seed round).
- Incoming investors will ask for expansion of the stock option pool to bring it to a certain percentage of shareholding (see ESOP section) and ask for this to come out of the existing shareholders’ pockets (including yours), which means your dilution is not only tagged to the incoming investors’ funding but also the expanded ESOP pool. This is an acceptable ask, but you do have some room to negotiate to fund the ESOP expansion pro-rata with the new investors (post-investment)
- Investors may often ask founders to invest their outstanding shares in disincentivising founder(s) from leaving the business. In principle, this is ok since you are a big factor in their decision, rightly protecting their investment. Still, they do not readily put all shares out for vesting but rather retain a proportion based on year of inception and year of investment.
- Redemption rights is an uncommon ask and should be avoided where possible; “At the election of the preferred shareholders, the Company shall redeem the outstanding shares on the third anniversary of this Agreement …”. From an investor perspective, this is downside protection and exit certainty. Still, from a founder’s perspective, it is an unnecessary headache and liability on her company — push back, but if you have to concede on this one, be very mindful of the redemption triggers, especially if it’s not time-based.
- At its simplest, pro-rata rights are the right of the shareholder to participate in future fundraisings proportionately to maintain their shareholding level — no problem. It gets interesting if an investor, usually a strategic investor, start asking for super pro-rata rights which effectively gives them the right to disproportionately participates in future fundraising, e.g., take 60 per cent of the next round even when their shareholding is, say 20 per cent. For the strategic investor, this is a great optionality play. Still, from your perspective, these are handcuffs that could potentially lock you out from your own company and alienate new investors.
There are a few important control terms to look out for, such as voting rights, veto rights, reserve matters, board seat and protective provisions — I can cover this off in detail another time, but the principle to follow is to keep it standard and clean unless you’re getting something valuable in return or running out of options.
The term sheet will also outline an exclusivity or “no-shop” period, asking you not to invest actively with other investors. In contrast, this investor conducts confirmatory due diligence and runs internal approval processes. Typically, this should be 60 days or less — do not give anything more.
You may have also been asked to fulfil certain conditions for the transaction to close, known as conditions precedent. Some examples are completion and provision of audited accounts and expansion of stock option pool.
During the Exclusivity Period, you would also start negotiating the binding transaction documents, mainly the Share Subscription Agreement (SSA) — between the investors and the company formalizing the terms of investment and Shareholders Agreement (SHA) — between the investor, existing shareholders, and the company to govern the relationship between these parties.
By now, I am hoping you have a good lawyer, and she can take charge of the negotiation here but learn to read and understand these agreements for yourself — very important.
I won’t go into the details here, maybe just a quick tip, insist that you create the first draft of these agreements rather than the investor — remember, the foundation is key.
Valuation, dilution and round size
How much you raise is as important as the valuation as both affect your shareholding (dilution).
I know it sounds simple, but we often obsess over the valuation, which underweight the round size and percentage dilution.
So how much should you raise? Ideally, you raise enough to reach profitability, so you are in a much stronger position if and when you go out to raise the next round, but some business models don’t work like that and need regular funding over several years to break even and that’s ok.
A good thumb rule is to raise as much to reach the next funding milestone, which can be a certain revenue threshold, the number of customers or market share— no less than 12 months of runway, about 18 months is ideal.
Valuation, especially for early rounds, is largely a matter of perspective. Investor’s perspective on the founders’ pedigree, size of the opportunity and market conditions spurring on your sector.
They also need to play within the boundaries created by themselves, such as standard shareholding thresholds and cheque sizes, by you, such as the financial projections and capital markets, such as the relative valuation multiples.
Despite all the analysis and factors at play, guesswork and FOMO both play a big part. Your absolute goal is to drive demand, secure multiple term sheets, close the round and move on.
Subject to the amount being raised and the valuation sorcery, you will typically accept dilution between 10–25 per cent for your first couple of rounds.
Adjust either or both variables but no more than 25 per cent, please.
Keeping your workforce informed on the fundraising plan and process is the right thing to do and an effective strategy. Here is why.
Every team member hopes for a big payday when joining a startup. If you are transparent and convincing about the path to the exit and a fundraising plan to get there, you will hire and retain great talent.
You would also need to call in for their help with fundraising as investors progress with due diligence and ask for deep dives in key areas (e.g. product demos, marketing strategy). Having employees who are well informed, incentivized, and “bought-in” will ensure a smooth process.
Now you do not need to do weekly or even a monthly update, but I suggest announce your plans before embarking on the raise, give an intermediary update and once the transaction is closed (but before the market knows).
Exit. Study the endgame.
“To succeed, you must study the endgame before anything else” – Peter Thiel / Jose Capablanca
As you can imagine, returns and exit analysis is a big factor in any investment decision — an early-stage investor’s business model is based on realising disproportionate returns from your company to provide proportionate returns to their own investors while paying for other failed investments.
You need to spend some time here and draw out an exit strategy— now, this is at least five years down the line if you’re an early-stage startup, so no one is looking for specific answers but rather a plan of the plan.
Strategic sale and public listing are the two most common exit avenues. For the former, you should have a good understanding of the potential acquirers and their businesses, recent M&A activity in the industry and acquisition rationale/your value proposition.
For the latter, please learn about the potential listing destinations (exchanges) and their requirements and thresholds, structures available (e.g. SPAC merger, direct listing, and listed comparable companies.
As you progress through fundraising rounds, the exit strategy will need to be constantly refined and upgraded; you will have to develop relationships with potential acquirers, perhaps, first as a partner or a customer; and you may also want to start speaking with bankers and/or directly with exchanges around Series B/C — to be aware of the market developments and plan if nothing more.
Plan Y, Z. What can you do when everything fails?
It’s been between four to six months since your first outreach, and you have spoken to over 100 investors with no success. You’re not alone.
Per a Report by Cento Ventures — In Southeast Asia, after raising a seed round, 25–40 per cent companies raise a follow-on round, and 10 per cent raise around after that (and five per cent after that), which means you are part of rapidly decreasing minority as you raise subsequent rounds.
What happens if you find yourself in the majority? Press pause.
Pause and reflect on the feedback — I suggest you compile and find the recurring themes from the feedback, e.g., “highly competitive market”, “unproven business model”, “low monetisation/margins”, “conflicted”, “not a focused geography”, “too early”, “uncertainty due to COVID-19”.
Tag each of these recurring feedback themes into either controllable — can change with effort and time (e.g. unproven business model) or non-controllable — not yours to change (e.g. don’t understand the business model).
Check if the high-frequency uncontrollable feedback exceeds the controllable and if not, best to ignore it, and if yes, ask yourself — will the market evolve soon to look at it differently? For the high-frequency controllable feedback, ask yourself — can you solve this, and how long will it take to solve?
After you have mapped out the feedback and believe there is light at the end of the tunnel, go back to the drawing board and draw a map of the tunnel but first, you may need to chart out a plan of survival.
It may mean that you have to raise funding from shareholders or put in money yourself, failing which, scale back operations to essentials-only. If that is not feasible either, file for liquidation and if you still have it in you, start again.
If you have read through both parts and reached the end of the post, congratulations — you can now continue your journey of becoming an absolute fundraising legend.
Remember and take comfort in knowing that no matter external factors at play, it is ultimately your resilience, execution, and vision that will get you the deserved success.
This article first appeared on LinkedIn.
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