Duet Partners
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A framework for ensuring investment readiness

23rd August 2020

How can founders better prepare their startups for funding success?

Even before the pandemic the pressure was building. Whilst the total amount of investment into high growth European companies had been rising for years, the number of transactions had been quietly declining.

In other words, investors have been gradually raising the bar.

‘Seed is the new Series A’ became the constant refrain through 2019 as average deal sizes ballooned. VCs had record amounts of dry powder to deploy but were placing fewer new bets.

This trend has accelerated through Covid. According to Pitchbook, in the first half of 2020 across Europe, deals over €25 million comprised a record 61% of overall deal value. At the other end of the spectrum, at early stage, the number of first-time rounds was the lowest annual total since 2009.

Investors are seeking more mature, lower risk profile opportunities. This means the stakes are now higher than ever. Founders must be truly ready to compete for the capital they need to bridge to safety and grow.

But not all preparation is equal.

Why VCs will pass on your startup

As a Startup to Scaleup advisor working closely with high growth tech companies in the UK, our primary job is to enable founders to beat the odds and secure their next round of funding.

In helping dozens of early stage companies undertake over $400M of transactions, we’ve developed and honed a framework for investment preparation. We described the basic structure in our earlier blog, Why VCs will ‘pass’ on your startup.

We mapped the classic reasons for investor rejection onto the framework: “the ‘No’ will be either due to a weakness in the investment proposition or pitching your story to the wrong investors. Either one will severely impact your plans, both will likely put you on the ropes.”

The investment proposition is the reason why an investor should invest i.e. What's in it for them. This requires a understanding of the where the business is in its life cycle, what must be achieved to reach sustained growth, and what it might cost to get there.

This is a journey that will be funded in stages and investors will assess each stage using evolving criteria - heavily qualitative in the early stages, much more quantitative as the business starts trading:

For a startup at Seed stage the most significant factor is likely to be people related - the founder, their insights, their vision, and their sense of mission.

At Growth stage (typically Series B onwards) it's more about commercial momentum, based on the financial track record being established.

But between these two, from late Seed to early Venture stage (typically pre-Series A, Series A), investors will be even more diligent in evaluating the risk/opportunity balance, given the inevitable lack of commercial track record.

This is 'the chasm', probably the most challenging point on the entire funding journey from Startup to Scaleup. Here the focus will very much be on confirming product/market fit, proving the initial go to market strategy, and validating the basic economics of the business model.

Applying the Framework

We have used this framework in dozens of investment preparation projects, in a process we call Investment Analysis.

The fundamental tenet of Investment Analysis is to have the founding team step outside their day to day view of the business and look at it as if they were an investor.

The first step is to build a simple profile of the business based on sector and stage. This enables us to identify a ‘long list’ of prospective investors based on their historical investing preferences. Here we are seeking relevance. We don't want to waste time pursuing investors that simply aren't a fit.

From this analysis, key insights then emerge around the types of investors that are active. For example: VCs, Family Offices, Corporate VCs, Regional Funds, High Net Worth private investors, and many other more niche players.

It's important to understand this breakdown, as each of these investor categories will approach the process differently. They will all bring something unique to the table. In the current environment, we particularly focus on those that have still been doing deals through Covid.

Understanding the target audience is the first priority. Yet it is amazing how many founders believe their number one priority in the investment preparation process is to write the pitch deck. This is the last thing to do, not the first!

Understanding the target audience is the first priority. Yet it is amazing how many founders believe their number one priority in the investment preparation process is to write the pitch deck. This is the last thing to do, not the first!

Researching the target audience will reveal a wealth of information. We take a detailed look at all their deal transaction data including the amounts they have invested, typical valuations, favoured co-investors, and many other factors. By examining their recent investments a deeper understanding of their likely investment criteria will begin to emerge.

Armed with this intelligence, we then complete a ‘investor scorecard’ to rate the company’s investment proposition. This incorporates the 16 most commonly used investor assessment criteria for each stage of company development.

A key ingredient in the assessment is the financial model. The importance of this increases as a company progresses through each stage. A very basic model will usually suffice at Seed stage but at Venture stage and beyond, a more comprehensive model is essential. More on this in our earlier post: Your Financial Model is much more than a fundraising tool.

The outcome of the scorecard is a gap analysis. This sets priorities for the most important investment preparation tasks to immediately address. It also helps inform the funding strategy.

Funding Strategy

The process of looking at the business from the outside can sometimes provide a big reveal for founders. This might be the first time they have really taken stock of how investible their business truly is.

With this highly objective view, it then becomes possible to determine a realistic funding strategy. How much should we raise? When? Who from? What will be the use of funds? What milestone will it take us to?

The pandemic has made founders very wary about runway. With such an uncertain period ahead, a huge number of top-up rounds have been raised to provide greater levels of cash contingency. Many have been financed by existing investors, but where external investors have stepped in the level of due diligence has increased.

They say fortune favours the prepared mind. Having a pragmatic, well-prepared investment proposition and a clearly targeted funding strategy makes the funding process much more efficient. This enables founders to focus on the most relevant investors where the story should really resonate.

Vision alignment with all new investors is critical. At early stage in particular, bringing on board investors that don't share your vision for the business will be something you will likely always regret.

Vision alignment with all new investors is critical. At early stage in particular, bringing on board investors that don't share your vision for the business will be something you will likely always regret.

Founder confidence

The Investment Analysis exercise enables both existing and new investors to take comfort from the fact that the team has a solid 360-degree appreciation of their proposition. Plus, they are much more likely to have clearer plan about future funding steps and their alignment with key business milestones.

We have seen founders really gain in confidence through the process. Not just for the next fundraise but for subsequent raises. They have a framework and a methodology that can be reused. They have the ability to now see their business more clearly from the outside.

Many have said this has helped to unlock the route ahead:

“Investment Analysis provided a clear and insightful analysis of where our business was, and what we needed to do to deliver value, and grow. Those priorities are on my desk and the focus of my activities every week.” 

“The Investment Analysis process provided great insight into the current funding market and an excellent critique of our investment proposition. This will assist in the further development of the funding strategy for the next round and to help ensure our state of readiness.” 

“I’d recommend it to any business looking to scale-up and seize every growth opportunity along the way.”

In summary

  • Investment preparation starts with deeply understanding your target investor audience. Focus on those that are most relevant - where there is clear stage, sector, and business model fit.
  • Scrutinise your investment proposition in the context of current market conditions for your sector and the stage your business is at – find all the gaps, set priorities to close them.
  • Build a funding strategy that has a realistic timeline and a use of funds aligned with the key stage milestones for your business model.
  • Finally, build a pitch deck that confidently reflects these insights and realities. Be in control and select investors that share your vision for the road ahead.

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