Forget death and taxes. For many companies, especially start-ups, the reality is fundraising and taxes. Whether needing $500,000 from an angel investor to turn an idea into practice, $5 million to ramp up production, or $50 million to break into the European market, companies need support.
Finding the right fundraising expert can be a daunting task, given the array of moving pieces that must come together. The ideal candidate must have been in the trenches of your industry, raising funds at the right stage. They should have faced down dozens of fundraising meetings, understanding where investors will probe and how to fully satisfy their inquiries. Finally, they should have an ironclad belief in your company’s vision, your business model, your valuation, and your growth strategy.
Divided into Seed, Series A-C, and IPO, this breakdown will cover the evolution of fundraising expertise needed by companies at each stage, providing a guide on how to find the fundraising expert suited to your particular needs.
Keep it simple, get it right
“The amount of money start-ups raise in their seed and Series A rounds is inversely correlated with success.”
—Fred Wilson, Co-Founder, Union Square Ventures
Most early-stage start-ups reach a moment when they can no longer afford to rest on their laurels. Employees cannot be paid in stock options indefinitely. Hiring full-time staff becomes a necessity. Capital must be raised and time is a founder’s worst enemy. The entrepreneur is often faced with the hard decision of taking a pause on building the company and going out to raise capital. If the former is chosen then the company could suffer and not meet important milestones and KPIs. Bringing on a fundraiser can, therefore, mean the difference between life and death, or growth and stagnation.
For a fundraiser to be successful, especially at the seed level, they must align themselves with the entrepreneur and have an innate ability to present the company in the best light possible. However, that process begins with a frank conversation delving deep into the business model. Expert fundraisers will look at a company with the critical eye of an investor. In order to create a bulletproof pitch for investors, a fundraiser will identify positives and negatives, challenge assumptions, and question business practices a founder may hold dear. This is valuable preparation for the scrutiny present at an investor meeting.
Set expectations right away
In terms of payment, it is important to decide what payment structure works for your company prior to interviewing candidates for the position. If you plan to pay a success fee, meaning they are paid based on the capital they are able to raise, then the fundraising expert must be licensed with FINRA as a [broker-dealer]http://www.finra.org/investors/brokers. This license is not required if they are hired on a consultancy basis, meaning they are paid either a salary or hourly rate to help you with the capital raising process. To put it simply, if you are paying based on success, the fundraiser needs to be licensed.
Then comes the time for the fundraising expert to get to grips with what makes your company special. The following steps should be expected:
- Putting together a mission statement and creating presentations.
- Detailed review of fundraising deck and core documentation to check for consistency in financials, projections, and statistics.
- Creation and refining of the company story and narrative as seed-level investors need to - believe in the entrepreneur as much as in the company.
- Making sure that the presentation is compelling for the investors (ie- the investors see how they will make their money back and more).
- Developing accurate benchmarks to guide in the projections.
- Ensuring that market research is done properly on a macro and micro scale.
With each meeting, the fundraising expert should be able to reiterate and further craft the company’s story, while being focused on one key rule - ABC (Always Be Closing).
The capacity of a fundraising candidate to always remain focused on the ultimate goal can be put to the test in the following way.
Q: Company A has only raised $500,000 in an early friends and family round. However, it is now expanding rapidly and has achieved a 50% MoM revenue growth rate. It is gearing up for its first official round of capital, seeking $3 million. What steps would you suggest to make the investor presentations as efficient as possible?
It is assumed a good fundraiser should come to the interview with a strong understanding of the company’s history and its successes. That gives them a good building base from which to investigate further with the following questions.
- Personal narrative: who are you as a founder, why is this company important to you?
- Why should an investor support you, the founder?
- Set achievable target and manage expectations, $10 million cannot be raised in the seed round.
- State of the industry: who is the competition, have they raised capital, how much and at what valuation?
- What is the best-suited tool to raise capital? (ie: SAFE note, Convertible note, Preferred equity)
- Clear communication about what is needed by the fundraiser and the deliverables being committed to.
- Discussion of specific deliverables (timing to complete marketing materials, assembly of marketing plan, reaching out to investors).
- Milestones to be achieved with the funds (viable product, key hires, launch dates, subscriber growth rate per week/month).
While fundraising situations will present a wide range of variables, there are certain deliverables that should always be expected from a fundraiser:
- Finalized investor presentation.
- Industry benchmarks, macro and micro
- Competitive Analysis, ensuring
- Business/Financial Model Review
- Operational Budget & Use of Funds
- Review/Build of Projections
Series A, B and C - Evolution of investor interests
“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.”
—Richard Harroch, Managing Partner, VantagePoint Capital Partners
The structure and valuation of a company’s first institutional fundraising will set the tone for future rounds as well as potential exit strategy options. The right expert for Series A and later fundraising rounds must have a deep understanding of the evolution a company must undergo and without which investors will not be interested.
Seed-stage investors focus on the idea, the strength of the founding team and the market opportunity. In contrast, growth-stage investors focus largely on the company’s business strategy, the ability of the management team to execute, and ultimately, the ability for the company to own a market segment.
A company needs to rely on a fundraiser who can guide it through expected milestones at the Series A, B and C levels. The stages are well-defined in what they typically mean to investors and a fundraiser must ensure company expectations are aligned with these:
The fundraising process will always require an initial fundraising presentation, a financial model and preparation for and responses to due diligence requests, but at each stage, the material will need to become more sophisticated and more thorough. Here’s a brief summary of what will be required at each stage:
Key Differences in Investment Decks
Series A: At this stage, a company can get away with a basic investment deck that highlights: the product, the problem you are trying to solve, the customer base you are targeting, the market opportunity, the basic pricing strategy and the initial use of proceeds as well as the strength of the founding team.
Series B: By this stage, the company can highlight its early success and the strength of its customer cohorts. It will need to be prepared to explain its customer acquisition strategy in more detail and its roadmap to contribution margin improvement. If appropriate, it should also be prepared to discuss its partnership strategy.
Series C: At the C stage, the investment deck should emphasize the link between the company’s historical performance to the forecast provided in its financial model. For example, it should provide detail on its recurring revenue base, its retention rates and the cost of acquiring customers. It should also be prepared to highlight demographic and geographic opportunities. And finally, the presentation should articulate how the company will compete against both large and small competitors and the differences in its marketing and pricing strategies.
Series A: A series A model should reflect the company’s pricing and customer acquisition strategy and operating cash expenses to provide investors a solid understanding of top-line forecasts and cash burn.
Series B: By the series B stage, the model must reflect top-line results that the company is prepared to meet or exceed. There will be more emphasis on cohort detail (acquisition costs, retention rates) and how that’s reflected in the model at this stage. And finally, the model should reflect margin improvement assumptions that the fundraiser can back up with market or operational data.
Series C: At the series C stage, investors will begin to look at the financial model with a more professional lens and expect the company to meet both top- and bottom-line forecasts. They will spend much more time examining historical and forecasted balance sheet performance metrics (e.g. cash conversion cycle) as well. And finally, the fundraiser must be prepared to demonstrate how new opportunities such as the introduction of new services, expansion into new markets, and potential acquisitions will affect the base case business model.
Series A: The company needs to have its basic corporate agreements in place (e.g must be a legal entity ready for outside investment), provide investors its important agreements (e.g. customer and partnership agreements, any agreements that reflect liabilities, patents/ patent applications) for review, provide customer and/or partner references and the founders may need to agree to background checks.
Series B: At this stage, the company will need to provide historical results and the due diligence process will involve providing investors with much more KPI data to back up those results and the detail provided in the model (e.g. cohort data, margin data).
Series C: The larger the raises, the more thorough the due diligence process, so at this stage, expect investors to conduct in-depth, on-site review and interview all of your key department heads on their competence and company expertise. This stage may also involve accounting and legal due diligence to ensure that the company is compliant with all appropriate regulation.
With all of this information in mind, a company should look for a fundraiser who has experience raising capital at the appropriate stage, and ideally, understands how the process will evolve over the company’s lifecycle.
Keep realistic expectations
Raising institutional capital is much harder than raising seed capital. In fact, studies show that for every 100 companies that raise seed funding, only 31 companies will go on to raise a series A.
An expert growth-stage fundraiser will not be afraid to ask an entrepreneur the hard questions and probe at weaknesses or concerns within a company, similar to the process outlined at the Seed level above. The main difference at this stage, however, is that at each stage of growth-stage fundraising, investors become more focused on the company’s results, and not only its potential.
As such, when you begin speaking to potential candidates, expect them to ask more financially-oriented questions such as:
- How much do you expect to raise in this round and how much runway should that provide your company?
- How do you see your go-to-market strategy evolving over the next two years?
- What do you expect the revenue run rate to be at the next stage of fundraising?
- What could happen to make the level or higher or lower at that point?
- What types of investments in infrastructure are going to be needed along the way?
- What differentiates your pricing strategy from your competitors?
Keep in mind that if the fundraiser is reluctant to ask the hard questions, they may not be prepared to answer the hard questions in the process.
A growth-stage fundraiser needs to be able to create a dynamic model that highlights the currents strengths of your business model and outlines a forecast that excites investors. Just as importantly, the fundraiser needs to provide a well-articulated and bulletproof explanation of how the company will reach those forecasts.
Assessing whether a candidate possesses these analytical and marketing skills is crucial. Casting yourself as a potential investor in one of their former companies can work well here, as per this example, to see how a fundraiser handles questions they may be asked about your company.
Q: Last year, you helped raise $2 million in a Series A round for Company B, a developer creating custom apps to automate business processes for the private sector.
- How was this amount of needed funding reached? What part did you play in setting it?
- What challenges did this company present to get ready for a Series A round and how did you address them?
- How do you see the cost of customer acquisition changing as the company expands and accesses new channels?
- What impact would that have on the lifetime value of the company’s customers?
- And how does that lifetime value compare to the value of the company’s competitor’s customers?
Here, a fundraising expert should be in their element. They should provide unique insight into the business model being described and articulate the opportunities with conviction. The story and metrics will likely differ but this should make you confident of how the fundraiser will position and pitch your business.
Be an expert or rapidly become one
A fundraising hire needs to understand your company’s competitive landscape to differentiate against other start-ups as well as established players. While the burden of explaining how a company’s strategy or technology differentiates itself may fall to the CEO or CTO, the fundraiser will need to explain how a company’s pricing strategy and cost structure compares to both the well-established and start-up companies in its space.
Testing their expertise again is a strong way of gauging a candidate’s ability to help you. For example, if the candidate has experience in an industry that is being affected by the movement from distributor models to direct to consumer models, their ability to understand the differences in cost structure and turn them into advantages is important.
The following questions, for example, can assess this:
- How much do distributors mark up the product from the manufacturer’s price?
- What are the costs involved in fulfilling orders directly to consumers?
- How do sales and marketing costs differ between the models?
Every question is an opportunity to convince investors. The right candidate should be responding with hard numbers when appropriate as well as highlight how the company performed favorably against its competitors.
Understand investor mentalities
As a company moves from a Series A to a B to a C, investors will likely become more sophisticated and pitches will need to be adjusted to the audience. Early-stage investors are often former entrepreneurs themselves whereas later-stage investors increasingly include not only late-stage VC funds, but hedge funds, crossover funds, mutual funds and strategic investors. This can result in a different type of chemistry that a fundraiser should be aware of before walking into a pitch. On more practical terms, it means that the pitches and subsequent due diligence process will get far more intense as the company grows and raises additional capital.
A top fundraiser should be able to handle the full spectrum of investment styles. When interviewing a candidate, ask them who they have successfully pitched in the past to confirm they have had successful experience with various investors. And follow up with questions on how the fundraising process differed between those investors.
A quality high-growth fundraiser will also understand how the strategic players in your space value companies. The ability to understand their ‘build vs buy’ philosophies can help a fundraiser successfully position a start-up for an institutional funding.
Cap table revelations
A company cannot see a Series A round as an isolated element. The terms of growth-stage funding rounds, especially Series A round, will set the tone for future raises. While ensuring company-friendly investment terms largely falls to your lawyer, a good financial fundraiser can lend a valuable opinion to the negotiation process.
The financial fundraiser should also understand the dynamics of the company’s investors’ portfolio structures. For example, the fundraiser should also keep an eye on the future and understand if current investors will have the appetite and capacity to participate in the next round.
Q: Without breaking prior confidentiality agreements, what main highlights emerged during your experience managing past cap tables with previous fundraising clients?
A fundraising expert should reference a number of areas, showing the breadth of situations they have managed. These may include:
- Prior investors exercising their participation rights.
- Needing to secure new lead investors at each round.
- Size and age of the investors’ funds.
Experiences of managing a cap table can serve as a good litmus test for any fundraising expert’s investor-facing skills. It involves a lot of relationship building, but also allows them to get to know the dynamic of the funds investing or potentially investing in your company.
IPO - No room for uncertainty
Unlike early investors (Series A-C) who have a higher tolerance for risk and therefore expect higher returns, the investors targeted during the IPO process typically have much less of an appetite for uncertainty. As such, it is critical that a company’s investment proposition builds upon a proven track record and provides a clear roadmap for future success. In circumstances where that track record is limited or appears bumpy, a good investor relations professional will be able to work with senior management to find the underlying positive story and tie this into a longer narrative that supports the future sustainable growth the company is forecasting.
No traditional interview process
Even the best investor relations professionals are only able to work with the information they are provided. Typically when contemplating an IPO, a company first engages its team of investment bankers, lawyers, and accountants as they all play key roles in preparing the financial disclosures required for the offering.
While this team, led by the investment bankers, will certainly have a well-developed understanding of the company’s investment proposition, they likely will not have given the same amount of thought to how that proposition will be conveyed vis a vis an investor presentation. Accordingly, certain valuables, such as industry insights, trends, opportunities may not find their way into the prospectus.
The particularities of an IPO process mean that using traditional “interview questions” when finding a professional is almost unheard of. However, the case study below may help companies understand how a potential consultant will address their companies’ needs.
Q: Your client, a $500M company contemplating an IPO, has brought you into a meeting and explained their auditor has finalized their most recent financial statements and noted a sharp decrease in profitability in the company’s international business line. The CEO explains that these results will be included in the prospectus being filed in 60 days, leading the management team and board of directors to be concerned about how the investing public will perceive these results. How would you respond?
While no two companies face identical issues during an IPO, a good investor relations professional will address any issues head-on. Prospective investors do not appreciate surprises and a strong investor relations professional will craft a narrative that speaks to any issues, but remains focused on the company’s long-term narrative.
In responding to this question a strong investor relations professional will:
- Enquire as to the reason for the decrease in profitability.
- Engage the senior management team in a broader discussion with respect to the company’s broader domestic and international business strategy.
- Upon understanding the nature of the decreased profitability and the company’s business strategy, present a narrative that addresses the matter constructively, with a focus on the business potential ahead, and how the company will achieve it.
- Provide examples of similar issues that they have dealt with in the past, noting the issue, its potential impact on the IPO process, how it was addressed and the response from prospective investors.
Taking the show on the road
Once the hire is made, senior management will spend countless hours working with lawyers, investment bankers, and accountants to prepare the lengthy regulatory filings required as part of the IPO process. And while some investors will read every word in these documents, the truth is that most don’t.
Therefore, a top consultant can ensure that the right marketing materials are prepared, as they will be is integral to the success of the offering. The best marketing documents don’t only separate the company from its business competition, but also serve to distinguish it from others competing for the money of prospective investors. A strong investor relations professional understands this and will be able to distill the seemingly endless content of a prospectus into a document that clearly identifies a problem in the marketplace, establishes favorable trends specific to the industry, and presents the company’s unique business strategy to monetize the opportunity.
Furthermore, an IPO consultant will be able to plan what has been called the “ultimate sales trip”: the road show, where executives can “have investor meetings every waking moment of the day, including investor breakfasts and lunches.” During roadshow meetings, management is limited to discussing only the information found within the company’s public disclosures, so involving an investor relations professional early on can be a huge asset as they can ensure that the content necessary to craft the most compelling narrative finds its way into these disclosures.
A final thought
IPO consultants are seasoned professionals with years of experience working in capital markets. As such, the most common practice when interviewing candidates at this level is to have a candid conversation with them. What is most important is the level of value added strategic insight that they are able to provide you. A good investor relations consultant will ask challenging questions, often from the point of view of more sophisticated investors, that will force you to think about previous assumptions. And in the end, the best consultants will be able to cut through all of the noise to create a narrative that speaks to the quality of the company, its management and its potential for investors.