Monday, July 14, 2008

Best Practices for Entrepreneurs Seeking Funding

I work with entrepreneurs every day who are going through the fund raising process. Over time, I’ve found some entrepreneurs employing practices that make the process go smoothly. For those who seek funding here are some best practices to consider in your fund raising efforts:

Develop a relationship with investors early on

I often come across entrepreneurs who say that don’t need funding right now so they don’t need to talk with investors. I sometimes ask when they will need funding and am surprised that the answer is usually six to twelve months later. I advise the entrepreneur to start developing relationships now. If you wait six months and then start looking you’re behind. In meeting with an investor the entrepreneur can state that he’s not ready for investment but then lay out the plans for developing the business. By building a relationship now and keeping the investor informed of your progress, the entrepreneur will be in a better position when it comes time to raise the funding.

Have ready the executive summary, slide deck, and business plan with financials

It helps to have the core three documents – executive summary (one-page only), slide deck, and business plan already developed and ready to go. As the entrepreneur meets prospective investors he can use the appropriate docs for each meeting.

Publish a periodical email newsletter for interested investors

In the fund raising process, I see some entrepreneurs sending out email updates to highlight the progress of the company. Some come as often as weekly to show progress in sales, product plans, and other milestones. This shows the company’s ability to execute.

Find a lead angel to develop a terms sheet and start off the funding round

By finding a lead angel and creating a terms sheet, the entrepreneur removes the biggest barrier to fund raising – the negotiation process. There are numerous angel investors who find the initial negotiation and due diligence process too time consuming. By eliminating this hurdle, the entrepreneur opens up the deal to a larger number of investors.

Make the deal terms “investor friendly”

Of course every deal must be negotiated. The harder the terms for the investor to accept the longer the time it will take to negotiate. By making the terms “investor friendly” through reasonable pre-money valuations, preferences, and other terms, the faster the process goes.

Push all due diligence docs to a password-protected web-site so interested angels can perform due diligence more easily

The due diligence phase can be sped up by having all the key docs already available. I’ve seen some entrepreneurs put everything on a protected web-site and then give out the password to interested investors. This knocks down the hurdle of trying to send 600 MB worth of documents through the email system.

Continue the quarterly email newsletter after funding so investors stay with you

It’s important to keep investors up to date even after the funds are raised since investors can help in other ways. Some investors bring a rolodex of contacts while others bring experience and coaching. By keeping them informed of your progress and challenges, they may be able to help. This practice is also useful for when it comes time for follow-on fund raising.

Best regards,
Hall T.

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