Financing Rounds and Investors Expectations
At this stage of your start-up, what level of fundraising need are you? Knowing what investors look for at every stage can save you great trouble with creating a compelling investment story.
As you progress through each funding series, take note of some of the key peculiarities discussed below:
The Friends & Family Round general
Experience shows that the friends and family round are getting bigger and broader.
Raising funds through friends and family provides some degree of comfort and ease, however, once you’re beyond your immediate family, you’ll definitely want a professional and organized presentation. You want to show them that this is a real investment opportunity. That you’ve done your homework, and you’ve planned through the risks from worst to best case scenario. You’ve considered how to protect them, and balance that with achieving the maximum potential for this business with room for future investors.
While this is still mostly about believing in you, it is important to get buy in to the vision too. Even if you don’t think your immediate family has much money to put in, their vote of confidence in you with their money can say a lot about you for future investors. Besides, you don’t really know how well connected you are until you start asking for introductions.
Seed Series Round
at this point, your startup can begin bringing in angels and accelerators to finance you and keep you in business.
As with any pre-seed investors, these capital partners are going to put most of the weight on you as the entrepreneur. Some will give more weight to your idea. Others more on your business capabilities and entrepreneurial grit.
As more VCs and other larger investors continue to put money in at this stage expect their expectations to grow too.
The money you raise at this stage may be used for more research, hard product costs, hiring and building out your team. How much due diligence and actual data will be expected of you may rely a lot on the size of investor you are dancing with. Some may be ready to write you a check based on your presentation. Others may want to talk to your customers.
Series A & B Round
here, investors are going to expect to see some hard data and a more compelling story of capability. You should have plenty of feedback from users and have validated your business. You should be able to show momentum, and at least one strong metric you have been focusing on.
You may not be making money yet. Or you may not be profitable. Though you should be able to demonstrate that fueling operations for the next 12 months with more capital should produce some predictable result, and hopefully warrant a higher valuation and new round of funding from larger investors.
The expectations on Series A are more geared towards having a clear market fit while on Series B investors are going to need validation on the revenue drivers.
Series C Round
This is where it’s going to get really serious. Get ready for some serious due diligence. In previous rounds one strong and respected lead investor may have performed most of the due diligence and others mostly followed suit. Now you’ve had a lot more time to develop the business and will be trying to raise significantly more capital.
Investors must do their due diligence out of a responsibility to their investors. They are going to have more money on the line. Even though you might not yet be a mature or profitable venture. They are going to want a lot of paper. They are going through financials, visiting locations, and talking to you weekly, if not daily.
At this stage you should have a proven business, a solid model, and just need to scale the amazing system you’ve created. This is the stage where you start to think about international expansion and replicating an existing model that works in other markets.
Make sure your bookkeeping is organized, your team in alignment, and your metrics showing consistent growth.
In most cases investors at this stage are looking for at least the possibility of an exit pretty swiftly. Any capital injection now should provide the money for acquisitions or just fast tracking scale and getting to the point an IPO is possible or you’ll be acquired.
Series D Round and Beyond
At this stage, funding engagement is a very strategic opportunity to roll up more of the market and dramatically increase value to buyers, or to expand into key markets which will make the company irresistible and warrant a higher share price. Expect a lot of extra questions at this stage of fundraising. Investors are going to be very sophisticated. They are going to be knee deep in your business conducting due diligence. It may be excruciating as the founder or CEO. Though should deliver a very substantial amount of capital.
Start-ups and SMEs should recognize the need to understand their timing for starting a funding campaign and appreciate the expectations of the investors depending on the type of funding required and stages of business. You need to know what they want to see and what they are looking for in an opportunity. Align yourself well, and mentally prepare yourself and you should find plenty of capital available and at the best terms.