If you are raising capital for your firm, prospective investors are going to want to know the answers to a number of questions, including:
- How much money are you raising?
- How much have you raised from whom already?
- How much have you personally invested in the company? (cash not sweat equity)
- How long will this round last (12 – 18 months is a reasonable answer)
- What are the use of proceeds? In other words how will you spend, or better put, invest the money in your enterprise?
- What measurable product, financial, customer, staffing, and other milestones will you achieve with this capital and when?
- What terms and conditions are you willing to accept as part of the raise?
- What is your pre-money valuation?
- What does your cap table – the listing of who owns how many shares – look like?
- What do your financial statements – income, balance sheet, and cash flow – look like?
I advise entrepreneurs to keep the majority of these answers out of PowerPoint presentations and executive summaries – documents that by their nature tend to get circulated around the investor world – for three major reasons.
Just as you would’t put your salary on your resume when applying for a job, there’s a time and a place for discussing capital requirements. Startups are dynamic, constantly changing organisms. How much money you need depends on your burn rate (how much money you spend monthly in op ex (operating expenses) and cap ex (capital expenses) and what if any revenue you are generating. Both numbers are fluid and subject to change without notice in a startup. Raising capital is a negotiation. How much you plan to raise and at what valuation also depend to a certain extent on market forces at play – is there a lot of cash out there, due to IPO and M & A exits, or are things tight? What’s the balance of power between investors and entrepreneurs?
So for the sake of good negotiating hygiene you want to keep the answers to these and related questions close to the vest until you have confidence that the investor is truly interested in and capable of making an investment in your company. And the fresher the numbers, the more accurate they will be.
Secondly, every company is competing for a limited supply of investor capital. Why give your competitors inside information on your company by revealing it in a document like an exec sum that is likely to get passed around amongst investors and could easily land in the hands of a competitor?
Finally if you do change major parameters of your investor pitch, the last thing you want is old versions of your financials floating around, possibly to be used against you in a negotiation with a potential investor.
You may need to publicize the fact you plan to raise capital, however you should reserve the particulars for investors whom you qualify and plan to enter negotiations with. Again there are similarities to finding a job, you should only give out your references when that’s the penultimate step in the hiring process.
- Don’t reveal the answers to questions about raising capital until you have solid answers, backed up by data, not wishes and hopes.
- Qualify to whom you provide these answers to keep your confidential information from ending up in the hands of people you would rather not have access to it – like your competitors.
- View a capital raise as a process of negotiation, not as a PR campaign. Only enter discussions with investors you have fully vetted (and investor due diligence is subject for another post) and whom you’ve spent enough time with to know they have a real interest in your company.
- As in a previous post, the best time to raise capital is when you don’t actually need it.