Getting Ready for a Series A Round of Financing for Your Start-up
By Jim Sacher, Partner, Tax & Business Services
You have a great product. You have progressed beyond proof of concept and are ready to begin growing your startup business. But to grow you will need more capital in order to focus on marketing, build out your team, refine the product, and create some infrastructure. The friends and family or angel investors who helped start the company are not going to provide the financial wherewithal to move the product forward. You are now at the Series A round of capital-raising.
This is serious business. The Series A round investors will usually be venture capitalists who specialize in startup financing. They are experienced and know how these deals are done. They see many pitchbooks in any given month and only have an interest in a very few. Once they take an interest in your business, they will expect to see a well-polished, focused business with a team that is ready to take that next step. Your business needs to look professional at all times and create a sense of FOMO in the minds of the investors.
So how do you get ready for the Series A round of capital?
Start with a solid forecast that mirrors your business plan. Starting with the numbers will help focus the story. The investors are interested in making money, not owning great companies. If the financial projections are supportable and match your business plan, investors will get interested. You need to know the assumptions behind each number and should be prepared to defend them. The investor group will ask a lot of questions, and knowing the reasoning behind the numbers will make them much more believable.
Your forecast should show a full set of financial statements, including a balance sheet, P&L, and statement of cash flows. The latter is important, as it will clearly show the burn and let investors know how long their money will last. You should show enough years to show the hockey stick growth everyone wants to see.
The forecast should also support your valuation for the Series A round and a path for the investors to understand potential valuations for the next rounds of capital-raising. You should have a value in mind when talking with investors and be prepared to defend it. In the end, valuation will be a negotiation, but you should at least be able to defend your position.
You can now put your story together in the form of a pitch deck. The pitch deck summarizes your business plan and must address the following:
- What is the problem/opportunity: what’s wrong with how the world currently works or what’s missing that the world needs?
- What is your solution/value proposition: how do you solve the problem or address the opportunity you just outlined?
- What is the underlying magic: why you and your company?
- What is your business model: how will you achieve the financial objectives?
- Who is the management team: why should we bet on them?
- Financial projections and key metrics: what can the investor expect?
- What have you achieved so far and what’s next?
- What do you need the money for: how will the money be spent to achieve the objectives?
The pitch deck should be a concise summary of your business plan. No need for details or a lot of words; you can explain it best yourself with just these few slides.
Do you need a formal business plan? Maybe, maybe not. Many investors won’t take the time to read a long business plan. But you need to have a plan and understand all aspects of it, whether you reduce it to a written document or not. Investors need to know that you know your business. A written business plan will crystalize the details of how you will make money with additional capital, whether you use the written plan or not. Creating a written plan is a good exercise if you don’t present it to investors. The business plan you started off with for the seed round is probably not relevant anymore and needs to be refreshed at a minimum. Your business plan should address:
- The market opportunity
- Your product
- Sales and marketing
- Barriers to entry
- Financial information
Take the time to start building relationships in the investor community. Get to know local investors on a personal basis before you start asking for funding. You can begin by just asking for advice or reaction to your business plan. Ask for referrals to others that might be similarly situated to have an investment interest. Ask your advisors and other professionals for referrals to possible investors. You should begin to build a list of possible investors, their interest in your space, types of deals that they have done, and possible strategic connections. Do your homework and research the players involved, the types of deals they have done, the size of their investment, and any other news on companies that they have invested in. Build a profile of each.
You should also keep in contact with potential investors with updates and milestones achieved. Keep in touch to build trust in the business and your management team.
Get your legal documents in order. A well-managed business pays attention to the details, and your legal documents are important to keep the business out of trouble. You should have your Articles of Organization and executed Shareholder Agreement or Operating Agreement at a minimum. You should be able to produce minute books for director and shareholder meetings that are signed by the appropriate officer. Any important contracts, employment agreements, non-compete agreements, and debt agreements should be available for review. Tax returns for the last three years should also be available for inspection. If you have protected intellectual property, you should have the legal support for the IP with patents, patent applications, copyrights, and trademarks/names. You should also have an up-to-date cap table showing all investors, date of investment, amount, number of units or shares, and price per unit/share. For each investor you should have a signed Accredited Investor Questionnaire.
The Data Room
The next step is organizing the data room. Your data room is the secure portal into your business for potential investors and the home of all the documents a potential investor will want to see. It allows easy access to documents in electronic form and can be made available to any number of potential investors. The data room is best organized in folders, something like:
- Business plan
- Financial information
- Intellectual property
- Organizational and legal
Keep the data room up-to-date and refresh information as necessary. The investment round may take some time, and old or stale information hurts your chances to look professional.
Now you are ready to begin to capitalize on the relationships that you have been building. Reach out to the potential investors you’ve identified and ask for a meeting to make your pitch. Plan on no more than an hour which would include ample time for questions. If you don’t get their interest in the first two minutes, your chances of success decline quickly, so be prepared and well-rehearsed. Know what you’re offering and at what price, what the money will be used for, what this will achieve, where the business is going, and when it will get there. All of your advance work will pay off in showing an organized, well-run business focused on success.
The professionals in Marcum’s Life Sciences and Biotech Group are dedicated to helping start-ups achieve success through every stage of financing. Contact your Marcum professional for assistance.