With so much money sloshing around the markets, you would think that it is very easy to raise large growth rounds these days. That is somewhat true, it is often easier to raise bigger cheques than smaller cheques but there are lots of prep work and pitfalls to avoid.
1️⃣ Preparation of docs & DD
Preparing your docs before you even put thumb to keyboard on raising your next round will save you a lot of time and heartache later down the line. I will write another post data rooms soon. But at the very least prepare:
1. Monthly management accounts
2. Budgets
3. Cohorts
4. Legal docs
5. Audits (at least 1 year)
5. Market research
6. Sales pipelines
7. Org charts
8. Detailed CAC/LTV analysis.
The DD will be painful and long, be warned! Not everyone invests at the speed of Tiger Global! Be organized for due diligence questions. Have a point person for all questions and then team leaders in each department that will help get answers. Finally, make sure you are launching you fundraise at a time that is right for you. Don’t try and launch a major new upgrade right before the fundraise or in the middle of DD.
2️⃣ Team
Make sure that the C-Suite has support as their bandwidth is about to be sucked up. Delegate as much as possible to ensure the business metrics aren’t impacted.
This would be a good time to hire a CFO if you don’t have one already and give them enough time to understand the business. Not only will this be a requirement anyway once you raise the growth round but an experienced CFO will also help you navigate the fundraise. Make sure they have help. There are going to be a lot of questions during due diligence (DD) so ensure they have appropriate resources that can help them dig out information.
Do ask people that have done it before. Other founders, late stage VCs or people like us who have been this for the last couple of decades, happy to help.
3️⃣ The Board
Get the buy-in of the board. Growth rounds will usually have a big impact on them. Could result in the buyout of early investors and a change in the composition of the board. The new lead investor will likely take at least one board seat. As the founder you may have had 2 seats with 2 for investors and an independent, this will not be the case post your growth raise. For the first time, VCs will have more seats than you. Remember to not allow “board observers” in lightly. They can be as noisy as board members.
4️⃣ Choosing the right investors
Choosing the right investors can be very hard as it’s a space that you have likely not navigated before. This is a very complex area BUT
1. Choose investors that have deep pockets, they can support not just this round but the next and hopefully the IPO
2. Ask them how much of the fund they have deployed, fund life is really important and there is another post on just that
2. Don’t be afraid of approaching large global asset managers and famous cross-over funds, I have worked with most of them for almost 20 years. They want to see your company and they are usually very supportive. Even if it’s too early, they will tell you quite quickly and provide detailed feedback in most cases.
3. Having said that don’t approach the largest and most famous investors first. Get practice with a few smaller firms. They will help you understand investor focus and right-size your data room and ask
4. Focus on the lead, not the followers. If you are raising a growth round in which you indicate a timeline to IPO, you will likely have a tonne of investors that will put their hand up. Focus on this that can lead the round first. If they can’t lead the round, politely take their details but move on.
5. It is all about relationships and vibe - If you are aligned and click with your investor that is worth its weight in gold. However, bear in mind that growth investors are a different breed than early-stage investors. Later-stage investors can be more numbers-driven and more towards a banker than the vision-loving early-stage investors. That is ok though, don’t be put off.
5️⃣ Use of Proceeds
Have a clear use of proceeds. I hope that by now you have figured out PMF and the business is really taking off. Ideally, your growth is just waiting to ignite if you had the required capital. If the capital is partially for key hires, have them identified. If it’s for building tech, make sure you have a detailed product roadmap. If it’s for expanding to new markets, make sure you know what they are and have done the basic groundwork on how you will succeed. Do not raise money for “experiments” or new businesses that aren’t your core. Feel free to allocate some proceeds but that can’t be the reason you are raising. Don’t be shy about taking money off the table as founders. Especially if you have been slogging away for years with very little pay, it is fine to take a little off. Be open with your investors about this and get their opinion.
If you are about to raise a growth round please do give us a shout, we are actively investing in the growth equity of tech companies around the world and are happy to lend you our team’s expertise on all aspects of strategic finance including raising the growth round, M&A, going public etc.
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