Jan 23, 2019
DOs and DON’Ts of startup idea testing
If your startup is looking to accelerate its growth by hiring a sales team, marketing team or has a customer whose needs require more resources, it may be time to fire up the F- word. It sounds intimidating but don’t let fundraising scare you! When done right, fundraising can be rewarding in more ways than one. Beyond its definition of adding funds to your project, fundraising can add priceless value to your startup through expertise from experienced entrepreneurs. This week, Beekeeper founder and seasoned fundraiser Cris Grossman encouraged us to aim big when fundraising in Switzerland and explained which essentials one should cover on their fundraising trajectory. Below we’ve summarized his fundamental fours and as always, added our Swisspreneur twist.
One: The Prep Work
Four: Do your diligence
To listen to the second of our two part series with Cris Grossman click here.
Each stage will take between 4–8 weeks. Plan accordingly to reach out and engage with VC’s at a time that’s convenient for them. Most VC’s aren’t working over summer or Christmas holidays so it’s a good idea to start the process mid September or early in the New Year.
Fundraising is more than just a pitch and the first step will serve as the brain for your fundraising operation. In these weeks, the thoroughness of your research and preparation is guaranteed to make or break any attempt at starting a relationship with an investor. In this phase, you should start by getting a handle on your audience. Make a list of the investors that would be a good fit for the round you’re looking to raise. Stay focused by putting time into the investors you need at said point in time; if you’re doing a seed round, seek seed investors, any other investors at that point are a distraction. Research your options beforehand and have a solid understanding of why you want them a part of your company.
Once you have an idea of your audience, it’s recommended to prepare both a short and more elaborate presentation.
Your presentation should include:
Further details in the appendix should include:
The presentation needs will vary depending on the stage you’re in. In early stages the presentation will need to sell investors on your vision, business potential and the people behind it. Later, it becomes less about the idea itself and more about the customer and traction with an emphasis on the business’s predictability in terms of revenue, overall health and growth. In a growth round where there is generally more money involved, you’ll need to go deep into the financial world and answer more questions on unit economics, cash efficiency, and performance vs. forecast for example.
You’ve gone deep into the facts and figures and finally it’s time for the fun part, going out and passionately pitching to (hopefully) eager investors! Think of pitching as the heart and soul of your fundraising process. Start with a phone call with the potential VC to determine if your interests align. Just like a sales call, you’ll want to first determine their sweet spot: where do they typically invest and what size of ticket. No doubt, a good pitch is one that captures the audience, however, sometimes the needs of the audience are forgotten. The more efficiently you can determine the fit of the VC to your team the better. Once you’ve determined this, the next step is meeting in person. Suggest a visit to your office to go deeper into the details of the startup and the VC’s potential engagement. There you can better discuss your dollar number in the topline, how well you can hold onto it and what qualities you have that will lead to that promise. Building trust in the relationship early on is heavily correlated to getting them excited about the deal. Following up in person also allows the VC to meet the team who would have otherwise been a distraction in the earlier screening process.
Negotiation of your term sheets is said to be a balance between science and art. Since no two offers are the same, the choice is rarely a simple one and will depend on the phase you’re in, what you’ve developed and which holes need fixing. Internal conversations between your team and existing board members should take place to help evaluate different partners.
Be clear in your mindset of what it is you’re looking for from the other partner. Consider their added value beyond meer valuation. Ask yourself and your team who you envision sitting on your board helping with the day to day, who is familiar with startups like yours or already gone through the process and how would they handle difficult situations.
Naturally, your selectivity depends on how many options you have. If you only have one investor interested, you’re limited in your negotiation. Conversely, your flexibility increases with the number of offers on the table. That said, trade off optimization means keeping in mind the value of quality, speed and simplicity over quantity.
One option is to let the VC propose their terms and define what they believe the business is worth. This is a good opportunity to see exactly how aligned you are or how well you’ve articulated your worth. To help guide them you could provide a list of terms from a previous contract as a template. This should include your KPI focus, growth and revenue measures as either GAAP or ARR revenue. Ensure the term sheet is simple and free of conspicuous clauses.
Similar to the previous three steps, doing your due diligence takes time and requires a lot of attention to detail. Be sure to go through all the documents, from contracts with employees and suppliers, to shareholders agreements and vesting schedules.
A good tip is to keep everything as clean as possible. Successful startups have a well organized data room with those documents ready to go so anyone external who needs to can come in for assessment. Naturally, these details in managing your paperwork depends on your priorities and there is a good chance your energy is better spent elsewhere.
You’ll likely have two types of investors. Those on the board who require more rigorous scheduling and those who are there for check-ins and working on deals or intros to customers with you. Regardless of the investment, a successful fundraiser keeps the VC informed about where the startup stands, where it needs help, and how the investor can support it. You can do so with monthly or quarterly reports. Finding the right cadence depends, as many aspects do, on what stage of development you’re in. How much is happening, how much is there to report? For this reason, quarterly is often preferable to avoid reporting more than you’re working and to allow your team to focus on more pressing tasks.
Remember, fundraising should depend on the specific needs of your business and not necessarily detract from the business itself. That said, every new round requires the same four steps: research, pitching, negotiation and finally due diligence. Below are some additional resources for each of those Swisspreneur steps.
Step 1: Measuring Traction
Step 2: Ten slides for your pitch deck
Step 3: The Harvard Business Review on Negotiating with VCs
Step 4: Due Diligence Checklist
Get updates and access to exclusive content. We’ll never share your email address or spam you.