Prepare all needed documents
In the previous phases you have worked out a solid plan. You reviewed and iterated it with potential investors and your current shareholders. Based on this you feel confident that the fundraising is going to work out.
It is now time to elaborate all the documents needed for the fundraising round. “Speed of execution” is a key factor for investors to take their decision, so you want to be fast once you get out and provide any additional documents needed within a short period of time.
The elevator pitch is a central tool needed for your financing round. You will need it in many situations, and sometimes unexpectedly. Not only when you coincidentally meet an investor in an elevator (pitching your idea in this situation is where the name comes from), but you may meet investors at business events, at the birthday party of a friend, or need it to get introductions.
The elevator pitch should be 30-60 seconds long, and needs to contain the problem, solution, traction and call to action.
Here is an example: “Every tenth person has sleep issues. We have developed an online course that helps participants sleep much better. Seven thousand people have already done the course so far, and 90% of participants recommend it to their friends. Thanks to this we are growing very quickly. Would you be interested in receiving our deck to find out more about it?”
You need to know this pitch by heart. Simplify to the max: Does your mom and dad understand it? The daughter of your neighbors who goes to high school? If they don’t it is still too complicated.
Teaser (also called "pitch deck")
You have developed and optimized your teaser in the previous phase. Now that the contents are solid you want to spend time to make it look perfect, and stand out from the hundreds of other teasers your investor has received over the last few weeks.
Here are the to do’s:
- Titles: Optimize the title of each slide. Make sure that it contains the key message of the page, and that it is short and to the point
- Text: While every slide needs to be self-explanatory, you want to have as little text on the slides as possible. Prevent abbreviations.
- Numbers: Surprise … investors like numbers! Be data-driven, use references where needed (e.g., in the market slide), and review the financial page with a CFO. This is not the place for creative accounting or funny ways to show your financials.
- Illustrations: Visualize/strengthen the core message of every slide by adding a graph, picture or design element. Only do it if the illustration makes the key point get through easier – you want to simplify not complicate the message.
- Design: Send the deck to a designer once everything is finalized. While the contents should be data driven, simple and clean, the design can be creative! Spending a few hundred dollars on this is money well spent.
Remember that an investor will only take a few minutes flipping through the teaser to decide whether she wants to setup a call with you or not. Make sure you get a yes!
Financials / cash flow statement
In phase 3 you have developed a simple cash flow statement. And the annual overview is integrated in your teaser.
Do one quick check in your cash flow statement: Reduce your revenue by 50%, and check what happens to your liquidity. Most entrepreneurs underestimate the time it takes to scale revenues. Especially B2B sales can be frustratingly slow. So make sure that you invest enough into marketing/sales, and try to keep cost under control even if revenues grow slower than expected.
There is not much more to be done in this step. However, be prepared that some investors will want to see your planning file to understand your assumptions, the monthly details, etc. Make sure that the document is clean and understandable for an outsider.
Last but not least, we strongly recommend to show the spreadsheet to an experienced CFO, CEO or investor. Ask them whether the calculations and assumptions make sense to them, whether you forgot any major cost blocks, and whether they feel that the big picture is right.
Information memorandum (IM)
After you have discussed the teaser, interested investors will want to go into more details to better understand your business case. This is where the information memorandum comes in.
You want to setup a structured deck of 30-50 pages. Start with the teaser that you have already elaborated – this will be the executive summary (note that this document will go to people who have never seen the teaser before, and don’t have time to go through everything).
Then add chapter after chapter. You can probably recycle slides that have already been elaborated for other occasions. You can structure the document as proposed below, or also according to your internal structure (e.g., telling the VP Marketing to put together 5-10 key slides and make this “his section”).
- Executive summary (these are the slides of the teaser)
- Product / technology
- Detailed explanation
- Product-market fit (if your product is live) – NPS …
- Patents (if any)
- Specific things (e.g., clinical studies in healthcare, regulatory approvals, data protection, …)
- Market and customers
- Further market insights (if any)
- Overview of competition
- Competition: One slide with a well structured overview of the competitive landscape incl. mentioning of key competitors (note: make this clear and realistic – sophisticated investors like if you fully understand your space incl. competitive threats, rather than being fluffy and telling them that all others are not nearly as good as you are)
- Customer analyses and insights
- Marketing and business model
- Who are your current and future customers?
- How do you reach them?
- What is your business model?
- If pre-revenue: Go to market strategy
- If post-revenue: Channels, current marketing setup
- Depending on your business unique visitors, MAUs, DAUs, conversion rates, CAC, retention, LTV,
- USPs / competitive barriers: Why is your offering sustainably better than others
- Insights about positioning, pricing etc (e.g., results of A/B tests)
- Financial history (P&L, annual and/or monthly revenue development, …)
- CF Planning
- Unit economics
- Current cap table, potentially description of key investors
- Financing history (size of round, valuation, key investors, use of proceeds)
- Insights about current financing round
- Legal (HQ, offices, …)
- Team, board, advisors
- OKRs (or alternative system how you set objectives and measure progress)
- Key partners
- Risk management: Do you understand the key risks of your business
- SWOT analysis
Obviously no need to do this all – pick the ones that are relevant for your industry and current stage.
Similar as the teaser, you want the information memorandum to be data-driven, to the point and well designed. Carefully review the final version, and potentially also have the designer of your teaser spend some time on it.
The data room is usually only needed in the very last phase, for confirmatory due diligence once investors have signed the term sheet. For early stage companies the data room may only include a few dozen documents only. For later stage companies it can consist of 1,000+ documents.
Setup a structure that is simple and intuitive. It can be similar as the one you created for the information memorandum. You will want to put all documents that could be relevant for investors, incl. financial reporting, legal documents (company foundation, shareholders’ agreement, key contracts), the minutes of board meetings, etc. Your lawyer will be able to give you a list with typical investor demands in your specific industry, company stage and country.
How should you make this information available to investors? For early stage companies a free cloud-based storage such as Google Docs or Dropbox is usually enough. Make sure you provide read-only access.
If you are later stage and/or have highly sensitive information you will want to use a more sophisticated tool. Such solutions will let you define sophisticated access rights, prevent downloads, watermark the documents, track the access history of each visitor, manage Q&A etc. Here are some of the best tools:
You may hesitate whether some of your critical know-how should be part of the data room. Even if investors have signed an NDA before they access it – you may feel uncomfortable sharing some of the insights. Especially in case of strategic investors or parties you don’t know well / don’t fully trust.
There are different ways to handle this. First, you could do this by defining different access rights – e.g. only providing full access rights to selected key investors. Second, you could grant an investor the right to come to your office and have a look at your unpublished patents, your customer list or your core algorithm for them to check that it is real. Third, you could appoint an independent auditor (e.g., an attorney or renowned software development company) to do an audit where the final result is only a green light, without the investor getting access to the details.
Traditional fundraising theory will tell you that the term sheet is provided by the lead investor. While the upcoming process will not prevent this from happening, we strongly suggest to setup a simple term sheet version yourself. This will help you structure your internal discussion, enable to get early commitments from your existing shareholders, and accelerate the speed of the process once you go out to investors.
The basic idea of a term sheet is to agree on key terms before spending much time and cost on negotiating the final contract.
Unfortunately it has become standard that term sheets have become long and complex. We ourselves have received term sheets from investors that are 30 (!) pages long. It often takes lots of time to fully see through all clauses, and in many cases even the support of a lawyer. Frankly, this misses the point of a term sheet.
We propose to radically simplify term sheets. Two pages should be enough, plus one signature page. While you do want to define a few key terms, all the rest should be plain vanilla. Refer to your Shareholders’ Agreement which you have reviewed in Phase 1 and should include many of the key concepts.
The term sheet should be non-binding for both sides, so in case of a big issue in the final agreements (which frankly should not happen) both sides have the possibility to step down.
Here is our version how such a term sheet could look like:
Here are some other templates and readings that may be helpful:
- Seed Round term sheet (short, crowd-sourced)
- Series A term sheet proposed by YC. US-focused, short, great template. Note that it is a template of a document with a lead investor, and includes an exclusivity period of 30 days (for final due diligence) which you do not want to include at this stage
- Series A term sheet by the Foundry Group
- Series A term sheet of the National VC Association (NVCA) in the US
- European focused seed term sheets
- Good reading about term sheet clauses – 7’ read
- Book written by Brad Feld, a highly influential US investor. Definitely worth the 30 dollars if you want to fully see through deal terms in the venture business.
Obviously you will need to align the final version of your term sheet with your lawyer. It is critical that all clauses are aligned before sending it out. But make sure that the document remains simple and short. And have a signature page included in the document for interested investors to sign. Even if the terms may (slightly) change in an upcoming term sheet provided by a lead investor, every signed term sheet will improve your negotiation power and bring you closer to FOMO.
Non-disclosure agreement (NDA)
NDAs are a hotly debated topic in the startup scene. At one extreme there are VCs who will stop talking to you if you only ask about this in initial conversations. At the other extreme are entrepreneurs who will not even send out a teaser without an NDA.
After having talked to thousands of investors across the globe we feel that a pragmatic approach to NDAs is the way to go. This means the following to us:
- Teaser / initial discussion: Do this without asking for NDAs
- Information memorandum: Ask for an NDA before sending it out. Beware that some investors may not be willing to sign it – in case it is a renowned VC we feel that this is not a no-go. But up to you to decide, or leave out a few slides which you consider critical.
- Data room: No access without NDA
- Contents of NDA: We feel that the symbol of signing an NDA is often more important than the exact legal terms. So it is usually ok to sign the investor’s version if this makes things easier. Check that duration is at least 3 years, and place of jurisdiction the city of your HQ or a neutral place.
Most startups will have NDA templates for research projects, business cooperations and other activities. These are typically mutual NDAs. For the fundraising process they should be one-sided and not require your countersignature (remember that you want to make the fundraising process as efficient as possible.) Plus, we strongly feel that an NDA should be short and simple.
Here is a template which you may want to use (as always, please align with your lawyer):
There are two additional options to keep documents under control even if an NDA is not (yet) in place: First, personalize all documents sent out by adding the investor’s name into the footer, jointly with the remark “strictly confidential”: It would be highly embarrassing for any investor if such a document is later found on the file server of a competitor.
Second, several companies such as Docsend let you upload your documents to their cloud. Potential investors only receive links rather than the document itself. Similar as in the case of a data room, this enables you to prevent downloads and register whether and how investors access the provided documents.
Pipeline of "good news"
Create this pipeline upfront – you want to have great news every 2-3 weeks during the fundraising process. This will help a lot to keep up a positive dialogue with investors who are in the decision process, and get the round closed.
Here are things you may want to include in this pipeline:
- Traction: It is highly powerful to tell potential investors who are considering an investment that you have grown again in the last month, or that you just reached a new daily/weekly revenue record. Growing traffic, MAUs, DAUs, B2B-leads, revenues etc can all be used here.
- Milestones: Reaching a regulatory approval (e.g., in healthcare / fintech), a patent application, a letter of intent LOI from a potential B2B customer, a media article talking about you in a positive way, a key hire, etc can be used here.
If you are a bit more established you may also try to bring the news about your fundraising round into media. News outlets such as MergerMarket may be interested in covering it in case this is of interest for you. Such coverage may result in inbound traffic from investors.
Look at your company from an investor’s angle and optimize
Put yourself into the shoes of a sophisticated investor. Besides reading your teaser and information memorandum they will do their own research and analyses. Some things you can influence, others not. Let’s go through the key sources one by one:
- Website: Is the message you provide in your documents consistent with the one of your current website? If not this may trigger red flags – so make sure this is the case.
- Google: Obviously you don’t have full control over the Google search investors will make. But make sure you understand what is found if an investor googles your product or company. If it is competitors popping up via ads or ranked highly organically, investors may ask you about them (ideally they are in your competition slide). If there are negative reviews you will want to prepare a good answer rather than being caught by surprise. YouTube videos from users? Media articles? Make sure you know the top search results.
- LinkedIn: Your company profile should be updated, and key persons mentioned in your deck attributed to your company.
- Social media: Make sure your Facebook, Instagram etc. is in good shape.
- Product reviews: If your product is live there will be reviews – on app stores, Amazon, etc. Make sure you have a full overview of how customers perceive your product. Be prepared to discuss the critique points customers mention in their 1-star reviews.
- Other: Investors may access various additional sources to check out your company – Crunchbase, Pitchbook, CB Insights, AppAnnie, SEMRush, etc. Getting access to these tools is helpful to understand how “neutral” sources perceive your competitive landscape.
Review Phase 5
Take the following anonymous test to check whether you are ready to move on to the next phase: