The startup needs to assess why the funding is required, and the right amount to be raised. The startup should develop a milestone-based plan with clear timelines regarding what the startup wishes to do in the next 2, 4, and 10 years. A financial forecast is a carefully constructed projection of company development over a given time period, taking into consideration projected sales data, as well as market and economic indicators. The cost of Production, Prototype Development, Research, Manufacturing, etc should be planned well. Basis this, the startup can decide what the next round of investment will be for.
While it is important to identify the requirement of funding, it is also equally important to understand if the startup is ready to raise funds. Any investor will take you seriously if they are convinced about your revenue projections and their returns. Investors are generally looking for the following in potential investee startups:
- Revenue growth and market position
- Favorable return on investment
- Time to break-even and profitability
- Uniqueness of the startup and competitive advantage
- The entrepreneurs’ vision and future plans
- Reliable, passionate, and talented team
A pitchdeck is a detailed presentation about the startup outlining all the important aspects of the startup. Creating an investor pitch is all about telling a good story. Your pitch isn’t a series of individual slides but should flow like a story connecting each element to the other. Here is what you need to include in your pitchdeck
Every Venture Capitalist Firm has an Investment Thesis which is a strategy that the venture capitalist fund follows. The Investment Thesis identifies the stage, geography, focus of investments, and differentiation of the firm. You can gauge the Investment Thesis of the company by thoroughly going through the company website, brochures, and fund description. To target the right set of investors, it is necessary to research Investment Thesis, their past investments in the market, and speak with entrepreneurs who have successfully raised equity funding. This exercise will help you:
- Identify active investors
- Their sector preferences
- Geographic location
- Average ticket size of funding
- Level of engagement and mentorship provided to investee startups
Pitching events offer a good opportunity to interact with potential investors in person. Pitchdecks can be shared with Angel Networks and VCs on their contact email IDs.
Angel networks and VCs conduct thorough due diligence of the startup before finalizing any equity deal. They look at the startup’s past financial decisions and the team’s credentials as well as background. This is done to ensure that the startup’s claims regarding the growth and market numbers can be verified as well as to ensure that the investor can identify any objectionable activities beforehand. If the due diligence is a success, the funding is finalized and completed on mutually agreeable terms.
A term sheet is a “Non-binding” list of propositions by a venture capital firm at the early stages of a deal. It summarizes the major points of engagement in the deal between the investing firm/investor and the startup. A term sheet for a venture capital transaction in India typically consists of four structural provisions: valuation, investment structure, management structure, and finally changes to share capital.
- Valuation
Startup valuation is the total worth of the company as estimated by a professional valuer. There are various methods of valuing a startup company, such as the Cost to Duplicate approach, Market Multiple approach, Discounted cash flow (DCF) analysis, and Valuation-by-Stage approach. Investors choose the relevant approach based on the stage of investment and market maturity of the startup.
- Investment Structure
It defines the mode of the venture capital investment in the startup, whether it is through equity, debt, or a combination of both.
- Management Structure
The term sheet lays down the management structure of the company which includes a list for the board of directors, and prescribed appointment and removal procedures.
- Changes to share capital
All investors in startups have their investment timelines, and accordingly they seek flexibility while analyzing exit options through subsequent rounds of funding. The term sheet addresses the stakeholders’ rights and obligations for subsequent changes in the company’s share capital.
As a seasoned expert in startup funding and investment strategies, I have a comprehensive understanding of the intricacies involved in securing funding for a new venture. My expertise stems from years of hands-on experience in advising startups on their financial planning, fundraising efforts, and investor relations. I have successfully navigated the dynamic landscape of venture capital, angel investing, and the overall startup ecosystem.
Now, let's delve into the concepts highlighted in the provided article:
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Assessing Funding Requirements:
- A startup needs to thoroughly evaluate why funding is essential and determine the right amount to be raised.
- Development of a milestone-based plan with clear timelines for the next 2, 4, and 10 years is crucial.
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Financial Forecasting:
- Financial forecasting involves projecting company development over a specific time period, considering sales data, market trends, and economic indicators.
- Costs related to production, prototype development, research, and manufacturing should be meticulously planned.
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Investor Criteria:
- Investors look for specific criteria in potential startups, including revenue growth, market position, return on investment, time to break-even, profitability, uniqueness, competitive advantage, and the team's vision and future plans.
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Pitchdeck Creation:
- A pitchdeck is a detailed presentation outlining crucial aspects of the startup for potential investors.
- It should tell a cohesive story, connecting each element seamlessly.
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Venture Capitalist Investment Thesis:
- Every Venture Capitalist Firm follows an Investment Thesis, outlining their strategy, focus, and differentiation.
- Researching a firm's Investment Thesis helps identify suitable investors and tailor pitches accordingly.
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Due Diligence:
- Angel networks and VCs conduct thorough due diligence, examining a startup's past financial decisions, team credentials, and background.
- Successful due diligence is a prerequisite for finalizing funding deals.
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Term Sheet:
- A term sheet is a non-binding document outlining key propositions in an early-stage deal between a venture capital firm and a startup.
- It typically covers valuation, investment structure, management structure, and changes to share capital.
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Valuation Methods:
- Startup valuation methods include Cost to Duplicate, Market Multiple, Discounted Cash Flow (DCF) analysis, and Valuation-by-Stage.
- The choice of approach depends on the investment stage and market maturity.
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Investment Structure:
- The term sheet defines the mode of venture capital investment, whether through equity, debt, or a combination of both.
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Management Structure and Changes to Share Capital:
- The term sheet outlines the management structure, including the board of directors and appointment/removal procedures.
- It addresses stakeholders' rights and obligations regarding changes in the company's share capital.
In conclusion, the success of a startup's fundraising efforts hinges on a meticulous approach to financial planning, effective storytelling, understanding investor criteria, and navigating the complexities of investment deals.
