At Highland Europe, one of the things we’re most often asked about is how to fundraise successfully. From selecting the right investors in the first place - and how to engineer introductions to them - to getting the market timing right, raising investment can often seem a bit like a game of snakes and ladders, with a few extra snakes thrown in for good measure. It needn’t be, so long as you get the fundamentals right.
1) Preparation, preparation, preparation
An old adage, perhaps, but the ‘six Ps’ rule applies: “P***-poor preparation provides poor performance.” So prepare well. But what does that really mean in practice? For me, it’s three things:
- Target your potential investors: above all, understand who focuses on what. Investors have their own pattern recognition. Some like pre-revenue businesses looking to raise €500k to €2m. Others, like Highland Europe, focus on a tight definition of growth capital (in our view, growth means companies with greater than $10m in sales, growing at more than 50% per annum and that possess a capital efficient business model). However, every investor will have his or her own criteria, so understanding your target group is hugely important and can save all parties a lot of time. My number one reason for not progressing with an investment opportunity relates to our focus.
- Great presentations work: At a minimum, you need to quickly convey your: business scale, proposition, ask (you’d be amazed at how often this is left out), executive leadership, and market differentiation. It’s tough to do well, so I’d suggest you dry run your presentation and see how people in your network react to it. Then, modify accordingly.
- Get your house in order: Fundraising is often a time-consuming activity. Great entrepreneurs learn from the process and improve their business models and company messaging as a result. However, when senior management, typically CEOs and CFOs, are consumed with the fundraising process, you need to ensure that the company’s financial performance remains on track throughout and that investor data requests are anticipated. So, be clear who is running the everyday business, while the top team’s attention is (unavoidably) focused elsewhere.
Growth investors, like Highland Europe, are typically data-hungry and want to pore over numbers, including customer acquisition calculations, customer cohort analysis, lifetime value models, churn data, upsell data, employee break downs, sales productivity, financial forecast models, historic financial data, analyst reports, competitor overviews, market sizing data and more.
The list is long and needs preparation and analysis. In reality, this data should be readily available and should be the data that the executive management use for making its decisions anyway. I walk away if a team can’t provide this data quickly, because it demonstrates a lack of control.
The ‘Get your house in order’ tip also includes preparing your legal team, ensuring you have a clear position regarding your intellectual property, employee disputes and potential litigation. This doesn’t mean everything has to be clean – investors know life is not that simple. But it does mean the position needs to be clear and thought through.
Finally, ensure your existing investors provide clarity on what they think about the process, plans and the amount they wish to invest. In other words, leverage your investors to the max.
2) Developing a network of investors
It’s a fact that a cold call to an investor is far less likely to succeed than an introduction from a trusted party. So fight for that introduction and network hard. Would I have invested in NewVoiceMedia if it wasn’t for the introduction to the company by Mark Farmer of Eden Ventures? Perhaps, but I do know the introduction helped massively and provided me with a much quicker insight into the leadership team and the business generally.
In fact, don’t leave networking until it becomes a necessity - it’s so much easier to do business with people you already know and have a rapport with prior to having a commercial need. Transactional people rarely get this point - the difference with investing is it’s not just a transaction. It’s easier to complete a divorce than it is to exit an investment, so you better make sure you and your investors truly want to join forces! Networking helps smooth this process and can provide a wealth of insights on which investors are in the market, who is good, who should be avoided and why etc.
3) Managing a fundraising process
The dichotomy for fundraisers to overcome is combining flexibility and rigidity.
Flexibility is needed because a fundraising process provides feedback and you need to respond and change tack accordingly; rather like sailing, you need to modify your plan depending on the weather. A company that I really like recently halted their fundraising process, stating clearly that they wished to return to the market in six months’ time. They listened well and, in my view, they will succeed next time.
Flexibility is also needed for timing of the market. Technology markets, both private and public, are volatile and judging when the fundraising market is most likely to be receptive to your company may boost your chances considerably.
Rigidity, however, is equally important. Fundraising is a process that requires a start and finish. While companies should always have an opportunistic eye on the market, they also need to run a proper process. As investors, we love competitive processes – indeed we prefer them. The simple reason is competition provides a superior answer for both investor and company. Not just in economic terms, but also in style and approach.
When things are going well you learn very little about one another. When appropriate duress and pressure are added to the mix, then relationships are properly tested – competition does just that.
There is a whole lot more to this subject, particularly surrounding negotiation, terms and legal documentation, to name a few areas, but deliver on the principles above, and in my experience, you won’t go far wrong.