Startup and high growth ventures seeking to secure growth capital should ensure that their company and value proposition is investable before approaching potential funders.
What does it mean to be investable?
If your venture is looking to secure third-party investment, you first need to ask yourself which type of investment will be best for your company. There are a wide array of company financing methods, including:
- Cash from operations – unlikely in an early stage company
- Grants incentives and other non-dilutive funding, which can be obtained from both state and federal government
- Debt, including loans
- Equity, including private funding rounds and tapping equity capital markets via an IPO or RTO
- Hybrid securities, including convertible notes
If your company is a high growth venture and you are leaning towards VC financing, typical investment structures include:
- Convertible notes
- SAFE notes – Simple Agreements for Future Equity
- Priced equity
Before approaching any investors, you should be firm in your knowledge about the above investment structures and how much equity (if any) you want to give away to third parties in exchange for finance.
You also need to consider the most appropriate point in your company’s journey to start seeking out investment, if applicable. Depending on the company’s projected growth or desired outcomes (retaining the company long-term or seeking an exit at a certain time), you will need to consider whether external investment should be sought early in the process, or much later once you have established stronger market validation.
Preparation: becoming investment ready
Sophisticated investors like VC firms want to see that your company is de-risked. The younger your company is and the less market validation you have, the more risk an investor is taking by providing finance. Most investors will only be prepared to accept the risk in early-stage ventures if there is a significant potential return and it has been sufficiently de-risked. As such, before approaching VCs or other funders (including government), you need to be clear on a range of topics (see below) to show that you have a pathway to commercialisation and ultimately value realisation for the investor. Typically this is articulated in the form of an Information Memorandum (IM) or business plan.
- Business model
- Management team
- Market size/market analysis
- Timing – why now?
- How your company has a competitive advantage
- The stage of your product development
- Customer acquisition strategies and profiles of existing customers
- Cash flow
- Projected financial model
- Qualified explanation of investor value
In addition to your IM, you should also present a pitch deck and three-way financial model to your potential investor – they need to see your company’s plan to believe it. If you are able to show strong market validation, including pilot client/customer reviews, a finished or MVP prototype or a demo of your product if it’s of an intangible nature. You should be prepared to present as a professional business that is ready to appropriately govern other people, which may include corporate governance documents and the above relevant information collated in a data room.
Pitching: generating interest, social proof and competition
To ensure that investors get on board with your proposition, your pitch will need to be succinct and impactful. By addressing the following questions, you can keep your pitch simple and concise:
- What is the opportunity and how big is it?
- How are you different to current offerings on the market?
- What’s your company’s story?
- How are you going to change the world?
- How are you going to make money?
- How much investment do you need and what are you going to do with it?
- How will that investment help you grow the business?
- What are the milestones and metrics of success?
Two major questions that you should prepare yourself for during your pitch are:
1. Scalability – how will you scale to capture global opportunity? Things to think about include:
a. Value chain/supply chain
b. Customer acquisition
c. Talent acquisition
2. Defensibility – how will you protect your asset and your market?
a. IP strategy
c. Supply chain
d. What is your locking mechanism
After guiding many clients through the initial investment process, we have seen countless examples of why companies fail to obtain funding, but also why companies succeed. During your pitch period, know that:
- Fundraising is hard work – don’t give up
- Connections are important – talk to lots of people and investors
- Clarity will help you articulate your needs – be clear on what you want and need, and why
- Investors have seen it all before – be realistic in your company’s valuation
- Market validation can greatly boost your opportunities – create competitive pressure and social proof for your funding round
Deal close: due diligence, term sheet and deal close
If your pitch is successful and you are presented with opportunities from investors, you need to be prepared and take advice. VCs and other sophisticated investors usually have a standard process by which they operate and, at the end of the day, they’re looking out for their own interests. In order to secure the best outcome for your company, you should:
- Be prepared for thorough due diligence
- Be respectful of people’s time
- Take advice
- Do you own due diligence – choose your investors wisely
- Create optionality if you can
Chrysalis Advisory provides advisory services in strategy and growth, innovation and commercialisation, commercial mediation and workplace investigations to support high growth ventures, transformation in existing businesses and outcomes in for purpose organisations. If you would like to discuss how we can support you to grow, transform and consider your business model please contact us.