ATDC Startup Best Practice Creating a Fundraising Strategy While capital is essential to fund the growth of technology-based companies, many early stage companies are passive in their approach to fundraising. A strong fundraising strategy not only answers the typical questions of who, what, when, why, and how, but also addresses critical issues necessary to complete a successful and timely fundraising. Key questions to consider include: How much do you need? What will you accomplished with the funds you will raise? How will this reduce risk from the investors’ perspective? Are you raising enough capital to allow you to focus on “the business” for at least 6-12 months before embarking upon your next round of fundraising? While you probably have a good idea of the amount of money you need to reach profitability, investors typical prefer to stage their investments to tackle individual “buckets” of risks: technology, market, and management. Typically investors are attracted to financings where the use of funds is dedicated to mitigating a significant amount of risk in one or more of these buckets. You will want to identify milestones for your business that address these buckets and then size your financing to complete these milestones. Don’t forget to include enough time to raise your next round of funding, typically not less than six months. Considering all of this, rarely will you see a financing that funds less than twelve or more than eighteen months of operations. Who are you going to call? Will you seek funds from friends and family members or will you pursue angel and/or institutional investors? Do you understand the motivations and expectations of the investors you are targeting? Are your expectations for control, governance, and valuation consistent with the expectations held by the investors you are targeting? While there is no such thing as a typical investor, there are distinct groups of investors that share similar attributes and expectations. For early stage companies, it is useful to think of investors in terms of their appetite for risk. For the earliest of opportunities, investment by founders, friends, and family members may represent the lion share of available capital. Mature companies with blue chip customers can access the commercial banks and public markets. Between these extremes, angel investors and venture capitalists are likely sources of capital for high growth companies. It is important to understand how your company matches the profile of these groups. Wise entrepreneurs select investors with needs and expectations that are consistent with the desires and status of their Company. For example, if you are seeking venture capital investment in a seed stage company, understand that these investors typically require ownership positions of 20-40% and various rights to influence a Company’s direction. How will you gain access? Have you identified specific individuals that you will approach for funding? Are you a known commodity to these investors? If not, can you secure an introduction? For many investors, investing in seed and early stage companies is a volume business. A $100M venture capital fund may receive over five-hundred business plans a year and ultimately invest in three to five companies. To deal with this volume, many venture capitalists quickly triage opportunities and focus their attention on proposals originating from know sources: current and former portfolio company managers, co-investors, and respected service providers (accountants, lawyers, etc…). Unsolicited proposals rarely result in a successful financing. If you find yourself tempted to just throw your business plan “over the transom”, instead of cold calling, spend your energy mining your network of advisors, service providers, and professional colleagues to find a strong referral. When will you start? Have you recently achieved key milestones that increase your attractiveness? How much time have you budgeted for the proposed fundraising? Are cash resources sufficient to fund operations if fundraising is significantly extended? Completing a prototype, concluding a field trial, hiring key management, and receiving first revenues are important milestones for early stage companies. From an investor’s perspective, completion of these milestones provide tangible evidence that significant risk has been removed from your business. Timing your fundraising to coincide with the completion of key milestones can have a significant impact on your company’s pre-investment valuation. Nonetheless, whenever you chose to start fundraising, make sure that you budget ample time, six months to nine months, to complete this task. What is the cost? What will you offer investors? What are the terms and conditions of comparable company financings? Have you considered all of the terms of a proposed financing beyond just pre-investment valuation? In exchange for cash today, you will promise your investors a portion of the Company’s future cash flows and rights to protect their investment and influence the Company’s direction. Typically this agreement is capture in a set of legal documents detailing twenty to thirty negotiated terms. It is key to understand that this is a negotiated agreement and while its basic framework is relatively standard; there are variations for each term determined by a variety of factors such as the specifics of your financing, your industry focus, and the overall balance of supply and demand for early stage capital. One of several key terms to negotiate is your Company’s pre-investment valuation. Many inexperience entrepreneurs inaccurately view valuation as the sole determinant of the economics of a negotiated financing. In fact, other terms such as liquidation preferences, anti-dilution protection, and dividend rights will also have an impact. Wise entrepreneurs consider all of the terms of a proposed financing beyond just pre-investment valuation. What’s plan B? How long can you continue to fund your business without additional funding? What will you do if you are unsuccessful with the proposed fundraising? When will you know that it is time to implement your “Plan B?” In the cases where you need to alter your fundraising strategy, it is useful to identify your “Plan B” at the start of the fundraising process. Typical contingencies include securing a bridge financing from existing investors, pursuing a lower growth operating plan, selling company assets, etc… Whatever option you choose, make sure that you identify triggers that allow you to implement your “Plan B” before the company exhausts its cash resources. Additional Resources: Several resources available within the Finance and Money Section of the ATDC Entrepreneur Resource Center NVAC model venture capital financing documents at http://www.nvca.org/model_documents/model_docs.html