The top tips for running a successful fundraise
In this article written exclusively for Business Leader, angel investor and author of ‘Money Train: 10 Things Young businesses need to know about investors’, David Pattison, discusses the top tips for running a successful fundraise.
There are a lot of businesses looking for investment and a lot of money in the market looking for an investment home. This doesn’t look like a trend that is going to end anytime soon.
I spend a lot of time advising businesses on how to prepare for the funding rounds. One area that is often ignored is how to make the relationship with the investor run smoothly through the process and through the life of the relationship.
Of course, it’s a long negotiation and there will always be difficult moments. The number one thing to remember is: Investors only care about one thing, and that is their money. In almost all cases how much money they make is how they are judged and how they then go on to raise more investment funds. It’s their job. Understand this and you will be on the road to a successful partnership with your investors.
What else can you do to help the relationship progress and make the investment journey run as smoothly as possible?
1. Make sure that investors and management expectations are aligned
When you are choosing your investors make sure that everyone understands the timelines, the strategy, and the management aspirations. Pay particular attention to the ideal exit/sale timing.
Funds almost always have a life. Most are around ten years but if you are a late investment, you may be looking at a period of five years. An investor looking for an exit just as the business is flying can be very financially debilitating and a huge distraction. It also causes a lot of friction.
Agree these areas before taking investment. Things are allowed to change on the way through because stuff happens, but again they need to be mutually agreed.
2. Make sure you have the right investors
If your investors are significant shareholders, you are going to spend a lot of time with them. You must work out early what type of investor you want. Anything on a range from arm’s length or helpful strategic partners.
In my experience, business owners do not welcome investors trying to run the business for them. Particularly individual investors with too much time on their hands, and often outdated working models.
If you have the choice, and very often you do, don’t just go for the most money. Work out what else an investor might bring, and if nothing else, whether you can work with them. Could you spend two useful hours in a room with them?
3. Raise money at the right time and at the right valuation
In most cases, fundraising is left too late. This always gives the upper hand to the investor. Two things happen: because it’s been left too late the business has to cut costs, so performance suffers, and the investor sees the money running out. Both give the investor the opportunity to rework the deal in their favour. This inevitably causes friction, which can linger into the future relationship.
Inevitably there are times when short-term money is required, but where you have the time, use it to get the best deal you can. Don’t let things drag on, set agreed time frames for things such as due diligence and exclusivity periods. If they aren’t met don’t be afraid to move on. Investors use delay as a tactic.
Valuation is an emotional area. Most business owners see it as some form of gladiatorial arm wrestle and want to maximise the valuation. I am suggesting being realistic, not giving your business away. A large percentage of deals fall away because of the gap between valuations and intransigence in moving. Often best to let the investor set the valuation and then negotiate from there.
Sometimes by settling for a slightly lower valuation, you will get much better deal terms. It will leave you in a very positive position and with less pressure to achieve another high valuation in the next round. Insisting on a maxed-out valuation can lead to a down round in the next raise and that really is a very bad look.
4. Making due diligence work for you
Due diligence is a daunting, time-consuming and distracting process. The questions that are asked can make you feel like a fraudulent criminal. But it can be a helpful tool in many ways.
I know several companies whose businesses have become better through the shortcomings highlighted by due diligence. If you approach it properly, it can be proof that you have a well-run, transparent business, and you can gain the respect and goodwill of the investors. This always helps for the future.
How you behave through due diligence will help set the tone for the future. Don’t try and hide things, they will be found. Do say no to ridiculous requests. Remember to use due diligence to check out your investors.
5. Make sure you hit your post raise targets
This is important, and you must give it your full attention. If you hit your agreed targets, most investors will leave you alone because they will almost certainly have an investment elsewhere that isn’t. Hitting your targets also builds confidence and trust.
When setting the targets do not be bullied into increasing them if you don’t think they are achievable. It’s a test, make sure you don’t fail it.
Don’t underestimate the distracting effect on the business performance that fundraising has. So often I see a dip in performance either during or just after the investment process.
Missing early targets is a massive stress. Make sure you achieve (or overachieve) your year one target. It buys you time and gives you credibility if you want to revise the targets moving forward.
The average marriage lasts for around seven years. Very often your relationship with an investor lasts longer than this. Choosing the right partner and working with as little friction as possible will always benefit your business. Be strong with your views and negotiations. But always try to understand what your investors need from you. After all, they have enabled your business to progress by trusting you with their money.
The more work you put into making sure that you raise the right money at the right time with the right investors, the more likely you are to have a cohesive and successful partnership with them. Good luck.