The role of advisers in capital raising has changed
Founders face a constant slew of challenges as they navigate from startup to scaleup. Sometimes it feels like there are roadblocks at almost every turn. For first time founders in particular many of these obstacles will be unexpected and unfamiliar. Expert help is needed, but it's not always obvious where it can be found.
Having spent 10 years advising early stage businesses, we have seen too many ill-informed entrepreneurs digging for answers in the wrong places, at the wrong time, or both. The classic scenario is the early stage CEO who urgently needs to raise capital within a few months and decides to seek corporate finance advice.
At Duet, most of our incoming looks like this. A CEO with a pitch deck, under time pressure get out in front of investors and raise their Series A. Can we help?
Often it emerges they have already made a few investor calls and been turned down. Suddenly the realisation hits that this is harder than they thought. There is virtually no time to course correct. Panic starts to set in.
This is all avoidable.
The first thing we need is a greater awareness that early stage funding is not an event, it's a process. A process that is essentially ongoing, at least until the company reaches growth stage. Experienced entrepreneurs understand this – they make the funding strategy part of the business strategy right from the start. It doesn’t just happen because we want it to. It happens because we have given it the thought it deserves.
With less than 1 in 5 Seed stage companies making it to Series A the odds demand a smarter approach. So, what can we learn from entrepreneurs who have been down this road before? In the formative phase, through Seed and Venture stages, how can we design for success? How do we develop the funding strategy? What kind of help is needed and when? This of course goes broader than just funding.
Proactive founders make sure they are tapping into a broad range of experienced help from inception. No-one is an expert at everything. But knowing that you don't know gets you halfway there.
Sometimes we just need answers to specific questions – Where can I rent cheap office furniture? Where can I find a good IP lawyer? Sometimes the questions will be more process-oriented - How do I get the company from point A to point B? Sometimes it will be a real hands-on requirement - How can we develop and implement a financial model and who can do this for us?
Another key trait of proactive founders is that they are well networked. Their network is often their first port of call. They have invested time, often over many years, developing close ties with other like-minded people in the business community. People they can trust and seek counsel from, usually under the flag of reciprocity.
Like any solid friendship, developing the network takes time, so it is a true investment. Particularly important are people in your peer group, other entrepreneurs on the same sort of journey. They may have already found a way to solve the very problem you are confronting. Keep a regular dialog with these precious contacts, keep them informed about your progress and find ways to proactively help them. Making intros is easy yet powerful.
Interestingly, I see this networking in its most innovative form amongst female founders, where informal support groups are often quietly developed. In a recent meeting with a female entrepreneur we were discussing the suitability of a particular investor. "Let me check with the group" she said and pinged her WhatsApp peer group of female founders. A few seconds later her phone was buzzing!
Where the company has taken some form of institutional finance at Seed stage, it is likely that an operational board will have been formed. Later, usually at the Series A round, the VC firms will almost certainly mandate the creation of a board, incorporating investor directors. Either way, this should provide a very useful resource for founders.
My experience with early stage boards though is very mixed. In my view the overriding requirement should be to have board members with startup to scaleup experience at both board and operational level, in a relevant sector. The biggest challenge is finding a fit with someone who also has recent experience - the funding market has changed so dramatically in the past couple of years. This can be a hard slot to fill.
Advisory Boards perhaps present a better opportunity to bring in key expertise as the company develops. The tendency so often here though is for boards to bring in industry ‘names’ whose presence, at least in part, is to lend credibility to the company’s business proposition.
This is all well and good, but founders must seize the agenda here and ensure advisory boards are refreshed to bring in early stage business building expertise as well as industry insight. I believe advisory boards should be there to primarily support the executive and be appointees of the CEO.
Let’s now return specifically to startup funding and the role of corporate finance advisers. Here we need to draw the distinction between what I will call traditional corporate finance advisers and advisers that are specifically set up to support early stage businesses.
As I said at the beginning, funding is really a process question; How do I get the company from point A to point B? Not a one-off question like ‘Can you please intro some investors?’
The problem is that until we have personally been through the startup journey at least once, we are conditioned as CEOs to think that the capital raising challenge requires purely transactional expertise i.e. traditional corporate finance.
This certainly becomes more relevant at the growth and established stages of company development (typically Series B onwards) where transactions themselves can be far more complex. The investment proposition by this point should though have fewer vagaries - the financial track record will do a lot of the talking. But at early stage things aren’t so simple.
For example at Seed stage, prior to initial scaling, everything is far more fluid. Investment proposition development is interwoven with the development and validation of the business model. Product/Market fit is being sought. The Go to Market strategy is being developed. None of this ever progresses smoothly or on the timeline anticipated. Early stage advisers will have this understanding embedded in their DNA and know how to work with it.
Identifying the optimum funding way points though the Seed phase is as much an art as a science. This becomes clearer as the business transitions from Seed to Venture, usually via Series A funding. But investor criteria are evolving as VCs seek out more mature propositions. Experienced advisers will be in tune with these changing needs.
Advisers that support the startup to scaleup journey as a process can come in all shapes and sizes. But in all cases, they should have first-hand early stage experience as well as proven advisory experience. As a CEO of a startup it’s much easier to spill your thoughts out to someone who has personally been through the same frustrations as you.
Whilst its unlikely that any one adviser will have all the business building answers themselves, they should certainly know where to find them. In addition to in-house specialists in core areas like business model evaluation and financial modelling, they will also have an established network of trusted partners that can be brought into support as required.
I can think back to several projects where in addition to developing and executing the funding strategy, we were also assisting on a range of topics that would have a direct bearing on the investment proposition: C-level appointments, business model validation/pivots, IP strategy, working capital model development, and others. This is beyond the remit and business model scope of most traditional corporate finance advisors.
There is also the question of investor expectations. For a Seed stage transaction, its rarely appropriate to have any advisers undertaking the funding mandate, essentially placing themselves between the founder and prospective investors.
In certain specialist or highly capital intensive sectors like Pharma this might make sense - the round sizes can be £10M’s. But generally, in the tech world investors would be surprised to be dealing with an intermediary prior to Series A. So, this presents another issue for founders who want the support of an adviser but not in the traditional, transactional role.
The good news is that some advisers are gradually shifting their business models as the needs of early stage founders are becoming more acute. About 3 years ago we reworked our entire approach, enabling us to unshackle investment preparation from the transactional side. We've had great client feedback following this move.
Founders must plan well ahead and make sure the funding strategy is part of the business strategy.
They must seize the opportunity to shape their advisory boards with early stage expertise that will truly help them build the business.
They should seek out external advisers early in the funding cycle to ensure they are creating a funding strategy and investment proposition that is in tune with market needs.
And above all they must relentlessly network and build a catalogue of trusted experts for every occasion. Easy.
About the author: John Hall is CEO and co-founder of Duet Partners. His 30-year tech career began with major US semiconductor and software companies, and was based in the Valley during the late '90's. Before Duet he was CEO of a VC-backed consumer electronics company, sold in 2009 following several rounds of capital raising. In the past 10 years since starting Duet he has advised dozens of founders on the startup to scaleup journey and is a retained Board advisor to a number of UK technology companies.