Raising capital is a hot topic for many scale-ups and, as part of an organization dedicated to help entrepreneurs tackle their most pressing challenges, it is a common theme for us at the office.
Last week we sat down with Deyan Vitanov, a serial entrepreneur based in Silicon Valley and a mentor at Endeavor, who shared his own experience on fundraising with one of Endeavor Bulgaria’s companies.
In this post, we summarize the key takeaways from Deyan’s practical mentorship session.
The fundraising process, in Deyan’s view, can be broken down to 3 steps, each taking usually 3 months.
The first is Preparation, which includes the preparation of the company’s fundraising materials (ex. 1-line, 1-paragraph, 1-page, 10-page, and 50-page presentation). For the deck, every slide should be easy to understand and set the stage for the next slide – the presentation should be logical and easy to follow. Another important part of Preparation is developing an investor list that is specific, including the names of the partners in these firms that you want to approach. For each investor, you should list who can make the introduction. This leads to the third priority within Preparation, which is to network with fellow entrepreneurs – they can give you feedback on your fundraising materials and help create the investor list, including make the introductions at a later point.
The second step of the process is Fundraising, when you are already talking to investors. As you start to actively approach and talk to investors, when asked at what stage of fundraising you are, it is best to answer “Not fundraising yet, but will start soon”- this usually means 10-12 weeks. In this case, you give investors a chance to learn more about your company and are not rushing them to make a decision too quickly. Once you have received at least one term sheet and when talking to other investors you can change your status to “We’re closing soon” – this means in 2 weeks and the point here is to get as many term sheets as possible.
The third part is Closing of the deal, which includes building the syndicate, negotiating and signing term sheets (pre-shareholders’ agreement), due diligence by the investors with the help of lawyers and auditors, and the signing of the shareholder’s agreement.
> Usually fundraising is a one-person job and this person best be the CEO, otherwise there are too many people in one room and it gets more difficult to organize logistically.
> Fundraising makes your life difficult. You should fundraise only if you absolutely need it. You should consider other forms of acquiring capital, such as debt financing, and only when these are not adequate should you raise. Additionally, when specifically targeting to raise capital from a VC, keep in mind that very few companies are a good fit for VC’s. Attempting to fundraise from a VC when you are not a good fit is both a waste of time and actively hurting you (if you succeed, you will be boxed in trying to do something that your business just cannot do).
> Timing is important – fundraising is seasonal. The key is to avoid talking to investors in December and August – since it takes 3 months to get the job done, you need to be smart about when you start.
> Do not fundraise passively – be decisive and organized.
> You should have answers to all the tough questions that the investors might ask you- do you due diligence on your competition well. Do not throw out there information you are not sure of. Investors talk to each other and will find out if any information you give them on your competitors is untrue. If you are not ready to answer tough questions on the market and competition, then it is better not to raise.
Still, capital raising is very individual and depends on the specific situation, the entrepreneurs, and the investors.
Stay tuned for the next post in Endeavor’s Take it up to the Mentors.