Secure equity financing
One of the first questions we get from many deep tech startup founders is “Can you help me to meet investors to get financing?”. And our answer is “They probably are not interested in meeting you yet. First let’s validate that you have a business idea that seems to make sense.”
Even after you have done the hard work of validating your business model, and then getting some traction in the market, there is still a lot of work to be done to be “investor ready”.
Here are some great tips and tricks for getting “investor ready”:
Part 1: Decide
Figure out why you need the money (and if!) and how much you need
In general, there are 3 main ways to fund your startup — non-dilutive funding from grants, loans from banks, and equity investments.
Start by updating your financial projections to figure out how much you need (and multiply the shortfall by 2 to ensure you really have enough!). Here is a template from District 3 to make this easier. Bryan Stolle, one of the Founding Partners at Wildcat Venture Partners in the US, has some advice about how much money your should raise for your startup.
Then go over your balance sheet to determine the best source of funding for you. Grants are always a good start and the ecosystem has plenty of them. And there are loans for startups too. Find ideas for funding opportunities for your startup at Info Entrepreneurs (a service of the government of Canada delivered by the Chamber of Commerce of Metropolitan Montreal).
Equity is not always the best answer. It can be expensive capital. You lose some (or total!) control and ownership of your business.
Example 1: Equity can always be bought and sold, so the equity partner you first choose might sell their ownership to someone you wouldn’t choose with different ideas about where the company should go.
Example 2: VC investors typically want out within 5-7 years so your growth trajectory will be dictated by that.
Our recommendation is always to de-risk your business idea as much as possible (that means getting customers and more customers to prove your product market fit) before jumping in.
Valuation, dilution and cap tables
If you are sure that you want to go this route, calculate how much you think your company is worth
Then calculate the percentage of your company that you will need to give up to get the money you need. It’s good to have a sense of what you are prepared to give up before you even start the process. Here is a handy calculator. And check out this very practical page on understanding dilution in the District 3 Startup Library.
Finally, you will capture the ownership story of your startup in a capitalization table. Any future investor will eventually ask to see a cap table. We have identified some good online tools to build Cap Tables:
- Captable.io: Captable.io is free, powerful, equity management software used by over 32,000 companies to keep accurate records, plan financing rounds, and save time and money.
- Carta: Carta helps companies and investors manage their cap tables, valuations, investments, and equity plans.
You can also use our D3 simplified template which breaks down current capital structure of your company and the dilution that occurs once you close a Seed or Series A Round.
Types of equity
There are different “vehicles” for equity financing and it is important to familiarize yourself with the different options before jumping in — and know what you would prefer and why. Here are a few articles to help get you up to speed:
The SAFE note demystified
Is the SAFE note really “safe”?
More info on different vehicles from TechCrunch
By the way, investors want to see the money being used to drive shareholder value — entering a new market, investing in important infrastructure — so make sure you have a clear business-related reason for the ask. Note to self: Being able to pay founders a salary is not a good reason! 🙂
Part 2: Prepare
Prepare, prepare, prepare
If after your reflection about whether equity funding is really for you, you still want to pursue an equity investment, the next step is simple: prepare, prepare, prepare. Give yourself about 1 month for this.
Prepare your story — both a pitch deck and a data deck. Here is a great playbook and sample deck to inspire you from the folks at Emergence Capital. (If you want more love from them, you can click here.)
Prepare 3 pitches: your 30 second, your 3 minute and your 30 minute pitch (You will need all 3 at different times during this fundraising process.)
Prepare the timing. You want this to be a frictionless process, so remove obstacles from your path before you get started eg. Don’t plan your assault on investors just as they head on holiday. And don’t plan your raise during your “slow” period when your results look less than stellar.
Prepare your investor list. Not every investor is interested in you, and you are not interested in every investor. Some investors are interested in early stage startups, while others are only interested in more mature startups. All investors have typical funding amounts and typical categories of investments. Don’t waste your time chasing investors who are not your target.
Investors are looking for and will expect a minimum return within a specific time frame. They are not charity organizations and will put pressure on you to make sure you deliver on your promises.
Check out this article that helps to explain the difference between investors and the link between investors and company type. Here is a free crowd-sourced list of investors to start your preparation, brought to us by Signal, the Investing Network for Founders, VCs, Scouts, and Angels. More sources can be found in the D3 Funding Cheat Sheet.
Part 3: Execute
And you thought you were running a business. Well… during a fundraise, one of you will actually be pretty much just focusing on the fund raising activities — supported by the rest of the team on an urgent/emergent basis.
Manage your investor pipeline like a sales pipeline
Your most important job in the execution phase is to manage your investor pipeline — just like you manage your customer pipeline.
The friends at Emergence Capital have shared a useful template for Investor Pipeline Management
Securing equity financing is not a job for the faint-hearted
The whole process from prep to close (after you have decided this is the best funding path!) in a well-executed fundraising process in the US will take a upwards of 3 months — approx 1 month for the prep, another 2-6 weeks for the execution to signed term sheet, and another 1 month to $$$ in the bank. It often takes much longer in Canada.
Before you jump in, here is a final bit of advice to run a perfect fundraise from the experts at Emergence Capital:
Author: Jane Somerville