Post on 11-Aug-2021
HOW TO
RAISE
FUNDING
How to Prepare
for a Fundraise
(Pre-Revenue)
eGuide
www.tencapital.group
info@tencapital.group
Contents PART I: Startups .............................................................................................. 4
Your Game Plan ......................................................................................................................................... 5
Funding for Your Startup ....................................................................................................................... 7
Should You Raise Funding? .................................................................................................................. 8
Best Source of Funding for Your Business ...................................................................................................................... 8
How Much You Should Raise ............................................................................................................................................... 9
PART II: Preparing Your Raise .................................................................. 10
Common Misconceptions about Fundraising .............................................................................. 11
You Must Know the Investor ............................................................................................................................................. 11
Yes Means You’ve Got a Deal ............................................................................................................................................ 12
Before You Raise ..................................................................................................................................... 13
Building Relationships .......................................................................................................................................................... 13
Preparing Your Raise ............................................................................................................................................................. 14
Key Documents ....................................................................................................................................... 15
Pitchdeck ................................................................................................................................................................................... 15
Proforma .................................................................................................................................................................................... 15
Data room ................................................................................................................................................................................. 16
Individuals Who Can Help With Your Fundraise ......................................................................... 17
Metrics and Milestones ........................................................................................................................ 18
Metrics ........................................................................................................................................................................................ 18
Milestones ................................................................................................................................................................................. 19
Deal Structure .......................................................................................................................................... 20
The Importance of Product and Market Validation ................................................................... 22
Are You Venture Fundable? ................................................................................................................ 24
PART III: Positioning the Deal ................................................................... 25
Impact Investing ...................................................................................................................................... 26
Multiple Position Points ....................................................................................................................... 27
Your Position Points .............................................................................................................................................................. 27
PART IV: Legal Issues ................................................................................. 29
Investor Accreditation ........................................................................................................................... 30
Intellectual Property .............................................................................................................................. 32
Employment Law .................................................................................................................................... 34
Legal Entity ................................................................................................................................................ 36
LLC ................................................................................................................................................................................................ 36
Delaware Corp ......................................................................................................................................................................... 36
About TEN Capital ...................................................................................... 37
PART I: Startups
5
Your Game Plan
In considering a fundraise, think about your ultimate goal with the business.
Below are some important things to think about:
1. Are you building a business that will be your lifestyle business for the
next 20 years?
2. Are you building a business that you plan to sell for a sizable gain in
the future?
3. What’s the exit plan for your business?
4. Where do you see the business ending up in the future?
5. What’s the timeline for the business?
6. If you know the exit plan of your business and how long it will take,
then funding the business becomes much easier to sort out.
7. If you plan to keep the business as a cash flow machine for yourself,
then revenue-based funding may be the way to fund it.
8. If you plan to sell the business for a nice return, then equity funding
will be a good option.
6
9. If you don’t need much funding, then you could cash flow it from
revenue.
10. If you don’t plan to sell the business and need a small amount of
funding, you could take out a loan and after you pay it off you have
the business free and clear for whatever you want to do.
The key is to understand the overall game plan for the business and then
decide how to fund it.
7
Funding for Your Startup
One of the biggest questions many new entrepreneurs face is:
How do you know if you need funding for your startup?
The following are things to consider when trying to decide if you need
funding or not.
First, consider the type of business you are going to build and what it will
take to get it up and running.
1. Are you setting up a services business?
2. Will it be a tech-enabled business?
3. Will it be a physical product business?
The type of business will determine your cash flow needs.
Service businesses can be bootstrapped by using customer money to fund
it.
Tech-enabled businesses typically need to raise funding due to the cost of
building out the technology that drives it.
Physical product businesses need to raise funding along the way due to
the cost of building product and inventory.
The second thing you should ask yourself is:
How fast do you plan to grow?
The faster the growth rate, the more funding you’ll need to grow it.
The slower the growth rate, the less funding you’ll need.
Consider these two questions to figure out how much funding you’ll need
for your startup.
8
Should You Raise Funding?
Funding accelerates what you already have going in your business.
Before thinking about funding, you should have a core process for
acquiring customers and providing a service. If you don't have this, then
funding at the early stage will only hurt your business.
It's best to continue testing your core business model until you know it
works. It's important to find the best channel for acquiring customers and
at the most efficient cost. By stating your core business in numbers, you
now know what it costs to grow your business.
Best Source of Funding for Your Business
In addition to equity funding, you may consider:
debt financing
self-funding
bootstrapping
Debt financing requires you to pay back the loan but after you do so, you
own the business outright.
You can self-finance which means you put in your own money into starting
the business.
You may also consider bootstrapping, which is another way of saying, find
a customer who will pay for your product/service. For this you may need to
offer additional services at a higher price to cover the startup costs, but this
is a great way to grow your business as it keeps you focused on your
product and customer.
9
How Much You Should Raise
When it comes to figuring out how much you should raise, the simple
answer is:
Raise enough so that it will take your business to the next level.
Think about the position you need to achieve in order to raise the next
round of funding. Your fundraise should take you there and set you up for
the next raise. Keep in mind that your valuation in any startup is low at the
beginning. Raising too much money at a low valuation will end up giving
away too much equity. For those with larger fund raises you may want to
break it down into several milestone steps in which case you can raise your
valuation for each step as you achieve more revenue.
10
PART II:
Preparing Your
Raise
11
Common Misconceptions about
Fundraising
In the world of fundraising, it can be difficult to navigate the limitless
information that is out there in regards to raising money for your startup.
Since there is some much information surrounding the topic,
misconceptions often get presented as facts. Below, are a few of the most
common misconceptions new startups face when entering the world of
fundraising.
You Must Know the Investor
One major misconception about fundraising is that you must know an
investor before you can approach them for funding.
This simply isn’t true. However, there are a few steps you can take before
approaching an investor that may increase your chances of success.
1. Seek validation from your own group before approaching those
outside of your core. The goal here is to start with your current
network and expand outward.
2. Identify the right type of investor for your deal based on risk and
return.
Angels usually want 3-5x their investment.
Venture Capital aim for 10x their investment.
Family Offices seek 5x their investment. One thing to note about Family
Offices is that they are typically more patient when it comes to their returns.
12
Choose the right investor for your raise and then seek those investors out.
Initiate a conversation with them and follow up with the goal of building a
relationship.
Yes Means You’ve Got a Deal
Another misconception is that once an investor has said yes then it’s a done
deal.
In most cases this just isn’t the truth.
Do not take yes as the answer to your fundraising prayers and expect to see
money quickly follow.
The yes in this case marks the start of the diligence phase. This phase
typically lasts 4 to 8 weeks.
13
Before You Raise
Building Relationships
Raising funding requires:
document
business preparation
pitching
extensive followup
However, there’s one thing you need to do before you can raise the
funding:
You need to build a relationship with the investor.
If you are raising funding through a crowdfunding portal you can call that
interaction a relationship, but only if you’re raising $500.
If you’re raising $50000, then you’ll need to build a deeper relationship with
the investor.
As you go through the process of gaining introductions, contacting
investors, setting up meetings and pitching, remember the fundamental
goal is to come away with a stronger relationship with the investor.
Think about it this way:
Each interaction means the investor gets to know more about you. You
also get to know more about the investor.
Keep in mind that even if the pitch doesn’t go as planned and the meeting
didn’t stay on track, that’s okay. The most important thing is that you still
grew the relationship.
14
Preparing Your Raise
1. For your business, check with your team, board, and investors to gain
alignment. Your fundraise launch should not come as a surprise to
these people.
2. Complete your investor documents including:
a. pitch deck
b. financial proforma
c. diligence room
3. Your financial proforma should lay out how much you should raise
and what you will accomplish with it.
If you’re not sure how to set this up, then write down your current revenue
and the revenue you will have in 24-36 months. From this, you can extract
how much funding you will need to raise and how many people you’ll need
to hire.
4. Your pitch deck should tell the story of how your business makes
money and why it will succeed.
5. Build your investor network.
Make a list of investors to contact including existing investors.
Setup a few initial meetings and tell the prospective investor you plan to
launch a fundraise in 3 months. This removes the pressure from the investor
and often elicits feedback on how much to raise, how to structure the deal,
and more.
15
Key Documents
Before your raise, there are some key documents that need to be in place
before you can approach investors. The 3 most important documents are:
1. Pitchdeck
2. Proforma
3. Data room
Pitchdeck
A pitchdeck is usually 10-15 slides introducing your deal to the prospective
investor. It should cover the basics of the business including:
1. The problem you are solving
2. The solution and product you are offering
3. The competitive advantage
4. Your business model
5. The team
6. Financial projections
7. Your fundraise amount
8. The exit you envision
Proforma
You’ll need detailed 3-5 year financial projections often called the
proforma. This gives the investor an idea of what you will do with the funds
and how you envision the company growing.
16
Data room
A data room is also known as a due diligence box. This data room contains
key documents about your business. These documents include:
1. Entity filings
2. Patent filings
3. Articles of incorporation
4. Income statements
5. Balance sheet
6. Other documents detailing your business
Investors who want to make an investment will look for these documents so
they can run their due diligence on you and your business. Be prepared and
have these documents ready before your raise.
17
Individuals Who Can Help With
Your Fundraise
When it comes to funding your startup, it’s important to know who you can
turn to for help. As a general rule, you start with your core network and
expand the circle outward.
The list of individuals in your core network should include the following:
1. Family
2. Friends
3. Coworkers
Next, you can look to your service providers for funding. This list may
include:
1. Attorneys
2. Accountants
Another potentially great resource for funding is past coworkers, so they
should be considered when you're in the process of seeking funding for
your business.
As you progress through this list, ask for referrals to second connections.
After you’ve gone through your network, you can expand the circle further
with:
1. Local angel networks
2. Local VCs
3. Local family offices
4. National angel networks
5. National VCs
18
Metrics and Milestones
Metrics
Entrepreneurs often find themselves bewitched by the idea behind their
business. A lot of times, these entrepreneurs believe that investors will write
them a check based on their idea alone.
While it’s true that many entrepreneurs have great ideas, the thing to
remember is:
No matter how great your idea is, standard startup metrics apply.
New technologies can capture the imagination. A prime example of these
new technologies taking the world by storm is blockchain in 2017.
Blockchain sent startups through a hyper funding phase. However, this only
lasted for a short time.
So, it bears repeating, in today’s world, standard startup metrics apply.
Standard startup metrics means:
1. You have a platform setup with users on it and line of sight to
revenue.
2. You have market validation and product validation – the user likes the
product and will pay for it at some point.
3. You, too, may be excited about your idea, product, team, or more but
don’t forget the metrics.
19
Milestones
In fundraising, milestones are specific goals you need to accomplish that
demonstrate the success of your business.
When crafting your fundraise story focus on key milestones including
those you just hit and those you are striving for.
It’s important to focus on these milestones because they demonstrate you
are making progress.
Here are the 4 types of milestones to consider:
1. Team
Make sure you are hiring key people that can help you grow the business.
2. Product
This means bringing the product to a new level of completeness.
3. Sales
Strive for achieving sales traction such as reaching $50K MRR.
4. Fundraise
Aim for landing a big investor with a specific commitment or investment.
While you may not always hit the milestones you planned, you will most
likely find success along the way which demonstrates accomplishment to
showcase to potential investors.
20
Deal Structure
Deal structure is an important part of the fundraise for any business. There
are two primary deal structures for your startup when you are seeking
funding:
1. Convertible Note
The convertible note is a debt instrument that converts to equity later.
While convertible notes are a great option, if you want to use a straight
debt instrument you should consider using a promissory note.
2. Equity
The next option to look at when it comes to deal structure is equity. The
basic function of equity is this:
It gives ownership rights in the company.
When using an equity deal structure, the ownership is set by the valuation
put on the company. An equity deal often comes with additional terms such
as:
Board seats
Voting rights
Deal Structures in Action
When just starting out, most startups use a convertible note to launch their
fundraise. The reason for this is because it doesn’t set the valuation of the
company which drives how much the investor gets for their investment.
As you move through the process, you will find setting valuation is a major
step in the fundraise.
21
Until there is a lead investor and the valuation is set, there will be many
investors who want to be in the deal, but don’t want to spend time setting
the valuation.
Later in the fundraise, an investor will express interest in joining. However,
that investor is likely going to want equity.
If the investor is looking at investing $100K or more, then they are a lead
investor candidate.
After the equity investment is made, the convertible notes convert into
equity.
22
The Importance of Product and
Market Validation
One of the biggest areas of concern with new startups is Product and
Market Validation.
It’s important for investors to know that the product works and someone
will buy it.
Investors look for evidence of this before moving into further diligence, so
be sure to demonstrate that your product is worth buying in your pitch.
Beta users are a great way to show the product functions and is of
customer interest.
For startups, the chance that you will get the product up and running is
fairly high. However the biggest questions are:
Will someone use it?
Will someone pay for it?
Customers who pre-pay for a product or service check the market
validation box. The reason they check this box is because it demonstrates
that you are solving a real problem.
If you don’t have anyone paying for the product or service, then you’ll need
to resort to pipeline metrics showing:
The number of downloads
Trials
Pilot programs
23
While this is not the same as a paying customer it gives a leading indicator
that the customer will most likely buy.
It’s helpful to show the funnel prospects go through in engaging your
product. This includes:
Lead generation
Qualification
Closing
Trials
Pilot tests
Signed customers
Keep in mind that Investors look for a consistent signup percentage on the
leads going through your program.
While the absolute number of signups may not be high, the repeatability of
your model can be compelling to the investor.
24
Are You Venture Fundable?
If you want to raise venture capital funding then there are a few areas of
your business that you will need to focus on. Check these points to see if
your startup qualifies for venture funding.
1. Recurring revenue
Do you or do you plan to have recurring revenue in your model?
2. Platform based approach
Are you taking a platform based approach to the product/service delivery
or do you sell one off products?
3. Data-centric
Are you capturing key data elements that improve your process and
product?
4. Strong Team
How strong is your team? Does each member bring expertise about their
field to your business?
5. Fast Growth (>50% YoY)
Are you growing at least 50% YoY?
6. Large Target Market
Are you targeting a market over $1B?
The more checkmarks you have on this list the more fundable you are with
VCs. If you’re lacking in some of these areas, consider how you can pivot in
order to make your startup more VC fundable.
25
PART III:
Positioning the
Deal
26
Impact Investing
The majority of angel investors want to make money and make an impact
while making returns on their investments.
For the most part, impact refers to how investors make a contribution to
the community with their investment.
Some angels do this through Impact Investing.
Impact investing means the startup provides a community service that goes
beyond generating revenue and providing jobs.
Impact investing is one way investors narrow the field of startups they may
offer funding to.
Each investor has their own set of issues they care about, so if you are an
impact startup you should understand:
The definition of impact is in the eye of the beholder.
Typically, if an investor wants to invest in an impact startup they look at the
company’s impact metrics and not just their financial metrics.
Financial metrics include cost of customer acquisition and lifetime value of
customers.
Impact metrics focus on the community benefit such as how many
students graduated or reduction in carbon footprint.
A good impact startup will have some evidence of the benefits they are
generating for the community, so keep this in mind when seeking
investors.
27
Multiple Position Points
Having a fine tuned pitch for your startup is a major key to the future
success of your business. A great pitch can lead to funding, afterall. In
pitching, you can position your startup in more than one way depending on
the interests of the investors.
Your Position Points
1. You can pitch for the sector your startup is in. For example, Edtech or
Fintech.
2. Many investors focus on a specific sector. If this is the case, you talk
about the metrics that investors look for in certain companies.
3. You can pitch your startup as an impact deal. Many investors have
impact investing as a part of their investment thesis and may engage
with your deal on that level alone. Talk about your impact metrics,
such as how many students graduated, or how many students' scores
improved.
4. You can position your deal based on monetization such as recurring
revenue.
5. There are many investors looking for SAAS businesses regardless of
the sector. For these situations, talk about your ARR or MRR numbers
and growth rate.
28
In most cases, your pitch deck is going to be the same, but what you
emphasize should change to fit the audience you are pitching to.
29
PART IV: Legal
Issues
30
Investor Accreditation
An accredited investor is a person who is permitted to make investments
that may not be registered with financial authorities.
It’s important to understand that in raising equity funding you can only
raise from investors who are accredited.
The Securities and Exchange Commission (SEC) establishes the criteria for
those who are accredited and those who are not.
If you are interested in the specific requirements you can find these on the
SEC website which is located here.
The rules were set in 1968 by the Securities and Exchange Commission and
have changed only once since then.
In short, an Accredited Investor is:
Anyone who has a networth of $1M dollars excluding the house they live in.
Note that there is also exemption that allows up to 35 non-accredited
investors to invest in your startup and this allows for both family and
friends funding.
There’s no formal process for achieving accreditation as most angel groups
and startups raising funding require you to self-declare accreditation.
There are two ways non-accredited investors can invest in startups:
1. Title III crowdfunding platforms
2. Reg A+ offerings
These require specific requirements such as:
licensing for the crowdfunding platform
31
registration for Reg A+ fundraise
The licensing and registration both provide compliance work to allow for
anyone to invest in a startup.
32
Intellectual Property
Intellectual Property is a work such as a product or a design, to which an
individual has the right to apply for a patent, trademark, copyright, and so
on.
It’s important to consider your intellectual property strategy when
launching your startup.
Intellectual property, also known as IP, generally includes:
patents
trademarks
copyrights
trade secrets
Here are a few things to keep in mind when it comes to Intellectual
Property:
1. You should trademark your company name.
2. For your technology, you can either file patents, or keep it as a trade
secret.
If you file patents, you will first file a provisional patent. This gives you 1
year to decide if you want to file a full patent or not.
Half the value of a patent is in raising funding. Investors will give you credit
for technology that is substantial enough to protect.
It’s common to file multiple provisional patents. During the following
twelve months after filing, you’ll have time to consider which patents are
going to provide protection against competitors.
Before the patents expire, you will need to file for a full patent on the ones
you want to keep.
33
The alternative to patents is keeping trade secrets. In this case, there is no
filing required.
If you have trade secrets, you’ll need to make clear to prospective investors
what value those trade secrets bring to your business and why they are
important.
For those who want to know the trade secrets, they must sign an NDA to
learn more. Do not discuss trade secrets without an NDA.
When discussing the business with prospective investors who have not
signed an NDA, talk about the benefits of your trade secrets rather than
how they work.
For example:
Our trade secrets reduce the cost of product build by 3x.
By doing this, you receive credit without having to reveal any secrets.
34
Employment Law
Employment law governs the employer/employee relationship within a
business.
When launching your startup, it’s important to have an understanding of
employment law and how it works.
Here are some things to keep in mind:
1. You should check to see what contracts your prospective employee
may have signed with a former employer around non-competes, non-
solicitation agreements, and assignment of inventions.
A non-compete means the employee cannot work for another company
that competes with their former employer.
If they signed a non-compete with a previous employer who is a
competitor, then this may be an issue when attempting to hire the
employee.
A non-solicitation agreement prevents an employee from approaching
your employees to hire them away.
Assignment of inventions means the prospective employee must sign
over their right to inventions during their work at your company.
2. All employees should sign a non-disclosure agreement regarding
their work at the company.
3. All employees should have a contract that defines they are working at
will. This means either the employer or the employee can terminate
the relationship at any time.
4. Correct classification of employees is a key point when it comes to
employment law. Taxing authorities will see if you have misclassified
35
an employee as a contractor to avoid paying payroll taxes, and
meeting minimum wage requirements.
5. There are wage payment laws which require payment for hourly
workers at a certain frequency such as biweekly.
36
Legal Entity
A legal entity is a company or organization that has legal rights and
responsibilities.
Your startup must have a legal entity to raise funding.
LLC
Start with an LLC or Limited Liability Company.
You can file for an LLC with your Secretary of State at your state
government.
The advantage to an LLC is that the cost is low and it will serve well for the
early stages of the business.
For family and friends funding, an LLC is a sufficient legal entity for your
business.
In the early days you can use an S-Corp designation with an LLC to defer
taxes to your personal filing.
Delaware Corp
As you move to raise funding from angel investors and venture capital,
some will want to invest in a Delaware Corp.
Keep in mind that it is easy to move from an LLC to a C-Corporation.
However, it’s more difficult to move from a C-Corp back to an LLC.
In most cases, investors will ask for a Delaware Corporation as it’s the gold
standard for legal entities in the US because it provides the best protection
for investors.
37
Note that most venture capital funds have set up their investment
documents to invest in a Delaware Corporation entity. They are not likely
to change this for your business.
When you are ready to raise funding beyond family and friends, make it
clear to investors that you will convert to a Delaware Corporation.
Entity conversion does come at a cost, so make the conversion contingent
on fund closing.
38
About TEN Capital
TEN Capital Network provides funding as a service to companies
anywhere raising venture capital. Its network of over 11000
accredited investors represents venture capital, angels, family
offices, and high networth individuals.
©2020 TEN Capital Network
www.tencapital.group
info@tencapital.group