If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is closing the deal!
This is the fun part. After all documents have been finalized and signed, maintain close contact with your bank to ensure that the funds have arrived. The deal is never over until the money has hit the bank. A closing dinner to celebrate getting things across the finish line is customary with the investors, management team, bankers and attorneys. (For inside rounds—rounds led and completely financed by current investors—a closing dinner is generally not done.)
Pat yourself on the back and realize that your work is only beginning. Now you have to execute on the plan that was outlined in your business plan and turn the money received into tangible value. The measure of whether or not the financing was successful is if the value created is greater than the money that was spent.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the drafting of legal documents.
This part is generally led by the legal team for both the counsel and company. While the VCs and management teams need to stay involved and negotiate remaining business items, generally much of the detail gets resolved between attorneys. It is to a CEO’s peril to abdicate their responsibility at this stage. The details can often come back to bite. Strong attention to detail by at least one member of the management team is a necessity.
Sample legal documents can be found at the National Venture Capital Association website.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the negotiation of deal terms.
The process by which negotiations happen is determined by several factors, including how badly the company needs the money, how many term sheets have been received and what other alternatives are available. If there is more than one term sheet, you can play hard ball—with the caveat that you still will need to work with the investors after the transaction is closed. There is a fine line between negotiating hard and being antagonistic. Keeping things respectful is important. This is an area where having a banker help lead the negotiation can preserve the relationship with the investors while still pushing hard for the best possible deal.
A company that already has money in the bank is obviously better positioned in a negotiation than a company without money. Companies that are raising money to increase their war chests for acquisitions, product expansion or to prepare for an M&A event have more leverage than companies that need the money to survive.
Often companies will need more money than one VC can provide either in the present round or at least later in the development cycle. It’s essential to build an investor syndicate to make sure there is enough money around the table when the time inevitably comes to raise more capital. Not having enough money from current investors for future, larger rounds can be a major mistake. It can also prove the downfall of otherwise successful companies.
Finding other VCs that the lead investor and CEO can work with is important and a collaborative process. By this point, presumably all economics for the transaction have been agreed upon and the signed term sheet can be “shopped” to fill out the round.
Attorneys should be involved in the term sheet negotiation but not around business issues, unless they have a particular perspective. The company must decide on these items.
Syndicates are often constructed by the lead investor, not the company. That being said, companies can veto investors that they do not believe they can successful work with.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the receipt of term sheets from prospective investors.
This is where it all starts to happen. All of the hard work you’ve put in to this point starts to pay off with the first non-binding term sheet. These can often be exploding or expiring in anywhere from 24 hours to 45 days. (This is done to minimize your ability to shop the term sheet to other investors to get a better deal.)
If your company is particularly strong, you can often overcome these provisions with confidence and the knowledge of your company’s true value. VCs don’t like to compete for a deal and they often try to strong-arm companies into accepting their term sheet. If they do this to you now before you have a formal business relationship, imagine how they will act once they have even more control over your future.
Understanding what a VC can bring to the table in a deal beyond their capital is important regardless of whether the deal is in tech or health care. A good VC can provide a network of potential partners, key employees, potential acquisitions, top-tier service providers and other key advice all “free of charge,” in return for their percentage of the company and all of the preferred terms that come with it.
In addition to legal review of the business plan/PPM, this should be the stage where more heavy involvement with your attorney should start. Make sure to have any incoming term sheets reviewed by counsel before returning to the investor. Trying to renegotiate a term sheet with provisions that you previously agreed to is difficult, bad form, and avoidable.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is to follow-up with prospective investors.
The three most important words in fundraising are follow-up, follow-up and follow-up. Venture capitalists are working on a million things simultaneously, including managing the fund and their Limited Partner investors, helping their current portfolio companies and sourcing and conducting due diligence on new investments. As such, keeping their attention focused on your deal is imperative. Don’t bug them but do be consistent and regular with your follow-up.
A focused due diligence effort will not only answer all of the investors’key questions, it will anticipate most of them.Responding quickly to a due diligence list shows your professionalism and will leave the investors with a positive impression of your company.
Here’s one more piece of advice: This stage can often involve investors conducting a site visit or calling your company’s advisors or other key opinion leaders.Having a common story between your company and your advisors ensures you leave a consistent message with the investors.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is the management presentation.
The slide presentation and potential demo that was prepared during the pre-launch phase is now presented to the targeted VC, often at a meeting of the entire VC partnership.This first impression is critical to deal success. In other cases, the partner who sourced the deal will take the first pitch and your company will need to return to pitch the full partnership. This first impression is critical to deal success as most investors will form their impression quickly after the start.
Here are a few pointers for putting together a solid presentation:
- Your first slide should be a list of investment highlights or an overview of the opportunity.
- In general, don’t take 20 minutes to build up to what you actually do as a business.
- Introduce members of the team early instead of putting that information last. Often VCs prioritize the team above everything else so it’s important to get this right and have the right people at the pitch.
- Market opportunity should be next and should introduce why there is an opportunity for a new company or product like yours.
- Next is the overview of product/service/data. This is where you provide the meat of the presentation.
- The commercial opportunity section should lay out how you plan to capture revenue and market your product/service.
- While financials are often very speculative, they are required. The fundraising plan is almost more important, at least in the short run, than the projected revenues because that is what the new investors will be “on the hook” for.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is to reach out to VC firms.
The outreach process is where the rubber meets the road. Once all of the materials have been prepared and the due diligence virtual data room is ready, you can begin to reach out to venture capitalists (VC).Depending upon if your company is using a placement agent, the outreach may be done by your banker, the CEO, CFO or another member of the senior management team designated as the point person for the transaction or for that investor relationship.Regardless of who is managing the process, the CEO will be involved in every pitch, unless the roadshow requires two teams to simultaneously conduct management meetings.
The initial outreach can be via phone or email to introduce the opportunity but any emails should be followed up by a phone call to make sure the executive summary was received and properly understood.A phone call can also help establish the initial interest and setup a management meeting.
Before sending the first email or making the first phone call, you need to establish the investment rationale behind your pitch to a particular firm and why your company is a good fit.The more tailored your pitch to a VC is, the more likely he or she will be convinced to take the meeting.
Another important point is that you must really understand the point and purposes of an initial email/first call.Your objective should be to get the VC to review your business plan/PPM and agree to listen to the management presentation (discussed next).
Trying to close the transaction at this stage is pointless so make sure your call script is oriented only towards getting the meeting.Many companies don’t make it to the management presentation so if you receive that opportunity, your odds of investment are much higher and you are in the game.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is to prepare your due diligence material.
This step is often skipped in the fundraising process, but the more you prepare for the offering before starting outreach, the quicker and more seamlessly it can go. However, since many companies desperately need the capital they’re trying to raise, company management often tries to jump the gun here.
One of the best pieces of advice related to raising money is to prepare thoroughly before you make the first call or send the first email.
For instance, it can take several weeks to prepare for due diligence so it is important to start preparation early. Create a virtual data room (VDR) to organize all relevant documents in a way that will make it easy for investors to conduct their due diligence.A VDR can protect the confidentiality of your company’s important data by ensuring that potential investors cannot print, save, or download the documents. Be sure to get all of your documents loaded into the VDR in advance and permissioned properly so that specific groups are able to access only the information you give them permission to see.
Keeping track of the process is also crucial to stay organized and in regular communication with potential investors. If you are not using a banker, you should consider purchasing a deal flow management tool to stay on top of the process. Sometimes these fundraising could entail outreach to 70+ investors, which is difficult to keep straight without a tool of some kind.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is to prepare a business plan and/or executive summary.
The Executive Summary is the short, non-confidential version of the business plan. It is usually the first document that is sent to prospective investors to attract initial interest in a management presentation. A private placement memorandum (PPM) is a fancy way of saying “business plan.” PPMs are generally prepared as part of a private placement using an agent.
Basically, your company needs to put together a plan for how it plans to make money; what it plans to use the money being raised for, and how it plans to return capital to its investors. Generally these documents are shared under confidentiality agreements, depending on the interest level of the investors and the sector being investigated. Life science companies generally require a CDA/NDA (Confidential Disclosure Agreement/Non-Disclosure Agreement) prior to sharing confidential data, but tech companies do not use this as frequently.
The management presentation is usually a Microsoft PowerPoint® slideshow that management presents to investors. It is usually safe to assume that an entrepreneur will have about an hour for each meeting and that the presentation will be frequently interrupted during the pitch. As such, the presenter’s prepared remarks should last no more than 40 minutes. You should also have an alternate, 20-minute version of your presentation with you in case only half an hour is available for some meetings.
As you prepare for the fundraising presentation, part of the process should be to practice in front of a friendly audience to get pointers and to help revise the message as appropriate. This “friends and family pitch” can be a big help in refining the story.
The management presentation should support the story but the presenter should not simply read from the slides. Visually, the presentation should contain plenty of white space.
The right business plan, well presented, can have a huge impact on your odds of getting funded, so doing this step well is very important.
If you’re following along with our series of posts on the venture capital fundraising process, the next step in the process is to hold a “kickoff” meeting.
Any good process needs a formal beginning and end. The organizational meeting—as many placement agents call it—gets all the people involved with the transaction on the same page. All roles and responsibilities should be sorted out at this meeting and you should formalize the timeline for the transaction and who should be doing what by when.
Who should attend these meetings?
- Company management team
- Banker or placement agent (if applicable)
- Lawyer (potentially by phone)
- Accountant (potentially by phone)
Often companies put together a fundraising plan and run it past their board of directors before starting the process. Sometimes companies establish a fundraising/transaction committee with a subset of board members who will keep in closer contact with the process than the broader board. (This is a good idea so that you don’t get more cooks than the kitchen can hold.) The level of communication with the board is generally established here and it’s important to have a clear expectation of how this communication will work.