Having supported 50+ UK scaleups to prepare for VC funding, I hopefully have some useful experience to share. Raising Series A is such a big topic that across a 6 week period, we deliver 24 hours of dedicated training. To get a taste of what we cover, here are 5 tips to help you begin preparing, if you want to raise VC funding in the next 12 months.
- Honing the investor proposition
Firstly, be clear on your investor proposition. Remember, investors make investment decisions not technology decisions, so being financially articulate is a primary requirement.
These are the 4 key numbers you should have researched, stress tested and be able to justify:
- Ask – How much are you raising? Where does it get you to? If not hitting profitability who will be funding the next phase of losses? Is it implied that this VC will be the subsequent investor? Will the valuation be the same or different for both tranches (instalments)? Does the ask, initial and any proposed follow-on investment required, match the VC’s investment criteria?
- Valuation – An emotive subject. How much of the company’s equity are you willing to sell to receive the funding you want to realise for your goals?
- Exit multiples – What could your business be sold for? To add substance, detail how other businesses in your sector are typically valued on exit. Ideally this will consider UK and recent comparable exits. This isn’t the same as investment valuations and relates to exit valuation.
- ROI – This is the magic number that if credible, will help you refine your target list of investors. All VCs want strong exits, but interestingly different VCs and investor types expect different returns. Some want high returns from backing “moonshot” business with a high risk of failure, while others want slow and steady growth with perhaps less stratospheric returns. Confusingly, sometimes the same VC will have different objectives based on how much money they have in their fund. The ROI is calculated by drawing together all of the above numbers; what equity stake a VC is buying at what price, what businesses in your sector are valued at, and how that relates to your Year 5 P&L forecasts, to imply likely exit and the VC’s share of this return.
- Document preparedness
It’s easy to find a variety of opinions on what documents are needed in a VC funding round. Our approach at The ScaleUp Accelerator is very thorough, and we sometimes get pushback from entrepreneurs who heard about someone raising off a pitch deck. In my experience, the more thorough the better. Very often the preparation of a full set of detailed documents reveals issues and challenges that can be addressed internally before being “spotted” by eagle-eyed VCs, either in their assessment or worse still in due diligence.
The documents we recommend are:
- A written business plan usually Word document or a detailed PowerPoint. This should be 20 pages max, plus appendices. It is key to get the right weighting; linking forecasts with fact, assumptions with existing proofpoints, not being too technical, and adding certainty to key commercial challenges.
- A teaser or exec summary. Ideally a 1-2 page Word document, a few slides or standalone content summarising the business, the goals and the investment proposition. This document helps VCs qualify the opportunity quickly, so it must be impactful and insightful to ensure working in your favour!
- Financial model. Believe it or not, I hear every month from entrepreneurs who use phrases like “it’s hard to forecast”, it’s a “work in progress” or “it will continue to evolve over time”. This uncertainty usually pushes the VC to defer the opportunity 6+ months out. Thorough financials with strong assumptions that can be justified on a line by line basis, help to get financially literate VCs comfortable.
- Pitch Deck(s) – Decks have different jobs to the introduction teaser, from first meeting to deep dive second meetings etc. They should tell a consistent story, with a clear narrative. This element is an art not a science, and often entrepreneurs are too close to the detail to create the initial top-level view that will appeal to generalist tech VCs. At The ScaleUp Accelerator we share our experience of crafting these investment narratives.
- Finally, VCs need proof points. Due diligence prep is a topic in its own right with 6 key areas of regularly diligence, and something like 16 sub-themes to evidence in a data room within this (see below). But summarising what is available, should terms be agreed in principle, via a Due Diligence Index provides valuable reassurance to VCs that the hard work has been done to add confidence to their investment decision. In addition, having this prepared upfront can speed up the time to complete.
- Pitch practice
Bringing your investment opportunity to life is the art of the pitch. The goal is for VCs to learn about you as founders, your business, your progress to date, your goals, your investment requirement, and most importantly what role and return they are being offered. To do this succinctly, often in less than an hour and without any inconsistencies to your business plan and financial model, requires practice and expert objective feedback. Don’t underestimate how long perfecting this will take.
- Finding the right investors
As smart entrepreneurs, you will undoubtedly have met some investors on your travels. But are they the right investors for your business and stage? More importantly are they right for you? Do you have the right relationship or ‘chemistry’ with them? If they can be convinced to make an offer, is it on the best terms possible? We have connections to over 1000+ possible Series A investors, including Family Offices, Ultra High Net Worths, VCs and Venture Capital Trusts (VCTs), EIS funds and Corporate Venture Capitalists, which can help to get a better fit, and ensure competitive tension in the negotiations when you get to multiple term sheet stage. Remember, not all investors are relevant to your business, your stage, or your aspirations, and shortlisting appropriate investors needs some careful thought and planning, ideally drawing on people who have worked with these investors in the past. Register your interest with us to learn more about our investor networks.
- Due diligence prep
The final tip which may be different to your expectations relates to due diligence. If you haven’t raised before, it means structured research commissioned by the VC into key areas of business risk. If you have raised seed funding before, institutional due diligence is considerably more rigorous than at seed stage; not least because there is now more trading data to appraise.
There are 6 key areas of internal / external due diligence for VCs to access. Some VCs will do this inhouse, some with external assessors.
These areas often include below for the data room:
- Commercial – are your clients happy, is your pipeline really as strong as stated
- Financial – do your management accounts confirm your story, are your forecasts’ assumptions verifiable, balance sheet issues, abnormal creditor stretch,
- Legal – no onerous contracts, litigation
- HR – are all employment contracts including founder’s director’s service agreements in place, how does the option pool work, tax implications, any tribunals, organagrams
- Operational – do you have appropriate systems in place especially as you scale
- Technical – is the product secure, and do you own it
- Plus business specific data requests.
A word of caution here, this can add weeks, if not months to a funding cycle, so getting a head start on this is key. You can be surprised even at the early stages of engagement with VCs when a question focuses on an area of detail such as IP, share options, board composition, which having prepared your data room, you will be able to give them reassurance before any unfounded concerns are allowed to become more firmly held objections.
This should give you an overview of the preparation that is needed to achieve an effective Series A. The ScaleUp Accelerator, run by White Horse Capital, as veteran of £350m of transactions, and The Accelerator Network, having supported 1,300 startups and scaleups, condenses the required learning around this process into 24 hours, followed by wholly contingent support until you secure your funding round. Talk to us if you need help with any or all of the above!
