- Be preemptive and intentional with your information; do the work upfront.
Set your key materials up in advance in a well-organized “data room” dropbox or other file sharing service. It saves times dealing with ad hoc inquiries and also sends a positive signal that you are prepared and well organized. Your Dropbox should be password protected, and you should only allow access after you have had a live discussion, ideally face to face, with the potential investor and been able to judge how serious they are. (See 2. below) Up to that point, the investors will have had your executive summary and pitch deck, so make them compelling. And when you send the deck use DocSend, so you can see who opened it and when and how long they spent on each page.
Your data room should probably include folders on:a) Team (the founders, key employees, advisors with bios)
a) Team (the founders, key employees, advisors with bios)
b) Legal/corporate info (articles of incorporation; patent info if relevant)
c) Financials (your forward looking model, recent balance sheet, recent income statement/cash flow statement, maybe sales pipeline, more details on use of proceeds for the round)
d) Investment materials (exec summary, deck, cap table with prior investors made anonymous; term sheet if you have one)
e) Sales and marketing (list of products, pricing, go to market strategy, sales pipeline maybe)market analysis (how you size the market opportunity)
f) Competitive analysis (more details on the players than the single slide you will have in your deck)
g) Technology (key aspects of the platform you are running on and roadmap for 6/12 months on how you expect that to evolve)
h) Exit strategy (more detail on recent exits and valuations than your deck; although there is a debate about how much to share on this topic!)
Angel Groups typically use Gust, ProSeeder or some other tool. If you are applying to angel groups, having all of the above will make your life easier when you complete their questions and get into the process. But make sure that whatever you post to them is properly formatted to their specific needs and of course, consistent with your own data room materials.
- Be preemptive and intentional with your process; do that work upfront too.
Whether you are raising your first $500K convertible note or running a multibillion IPO process, most all fund raising has a common element, momentum, which is your friend. If you follow Tip 1 you will have your materials ready to impress investors when you start your “process.” Do work on that process upfront too. By using tools like AngelList and Crunchbase, you can identify investors who seem to be active in your space. Triangulating with LinkedIn and maybe their personal or fund websites (mine is Lucas Point Ventures), you can draw up a pre-qualified target list of investors and work out close enough connections to get you a “warm” intro to those investors. A neat new tool that can help you with that is Conspire. Once you have your materials ready and your target list ready, then when you “pull the trigger,” try to pull together as many initial calls and meetings as you can, as quickly as you can. Done well and with a good story, you can create that all important momentum, so investors can talk about and ask each other about you (= social validation) and in the best case scenario, creates investor FoMO. Let’s face it, investors tend to have a herd mentality, so you need to try and get the herd engaged with you!
- Do your own due diligence early to gauge an investor’s “seriousness.”
At a basic level, being serious means they have the capacity to invest. As you connect with investors, you need to work out if they are really potential investors in your business, and right now. Your own due diligence, at an early stage, should include asking: What is your usual check size? How many new investments have you made in the last 12 months? How many have you followed on? How many new investments are you planning on making in the next 12 months? Who have you tended to invest with? The quicker you establish whether you are face to face with a serious investor, the better you can allocate your time. Non active investors are likely to be inexperienced and may ask a ton of questions to no end. They are unlikely to be connected to other investors. Of course, they are less likely to provide the capital you are talking to them about in the first place. In contrast, serious investors will not only be more time efficient, but they have friends who are also serious investors. Since these folks often share ideas with each other, one of them is a route to others and a source of all important momentum. (I did a webinar in late 2014 on entrepreneur due diligence on investors focused on your first VC round with Early Growth Financial Services. You can see the deck HERE). One useful resource on smaller VCs is the excellent spreadsheet prepared by Shai Goldman at Silicon Valley Bank. This gives you a sense of who raised how much and when. Final point here, even serious investors take time to make up their mind, so each and every meeting/call you do with them, close out by asking whether they have any questions or concerns. Only when you can sense their growing confidence about your company, does it make sense to start to make a more concrete investment ask.
- If you have a term sheet, make sure that a deal breaker isn’t lurking in there.
Avoid a delayed action term sheet derail! Typically, if you are raising a note, you set the terms or do so in negotiation with an initial investor. So as you approach other investors, the terms are “set” obviously; also true in a priced round with a lead. Note terms are pretty standard. In terms of being “at market,” no experienced investor would bat an eye at a note with a 12-24 month term, 20% discount and 4-8% interest rate, so the key parameters are beyond the money cap. (Memo to first timers: you need to know your way around this language.) But what about the investor who wants to see a MFN (Most Favored Nation) clause (only 15% of notes). This ensures if future note holders get more favorable terms as a holder in a prior note, you are entitled to them too. Want some form of preemptive right (some 25% of notes)? If they are deal breakers for that investor, you want to find out right away! So once you have shared the term sheet, don’t just leave it to chance. Ask the investor if they have any questions or want further clarification. Assessing if the cap is reasonable will be their focus of due diligence. You don’t want to expend your time doing that, then for things to derail if they want the MFN and there isn’t one. You can of course add terms, especially investor friendly ones, as you go along, but that becomes a pain, especially if money is already committed, and you want existing note holders to approve changes.
Image credit: CC by Nic McPhee