If you are the CEO or CFO of a start-up company that has successfully taken a business concept and built it into an operating company: hats off to you! You may now be looking externally for significant assistance to take your company to the next level of growth, which usually entails an external round of financing. And the process of a successful Series A funding round requires a lot of new skills (e.g., negotiation, financial modeling, relationship building, patience, long-term planning, etc.) that you may not have needed as an operational entrepreneur securing seed funding.
In order to best prepare for a successful round of institutional financing, we have pulled together a few tips and words of general advice.
Is a Series A Funding Round Your Next Best Path?
If your company is a turning point and needs a large cash infusion to continue operating and/or growing, two factors will determine if a Series A funding round is best for you.
One is timing, and the other is the purpose.
If the need is near-term, then you do not have time to initiate a financing round with new investors, as these processes tend to take at least six months to close. Your best bets will be to either reach out to existing investors and their networks or to establish debt or a short-term working capital facility. Your existing relationships will be of greater benefit in this scenario because they understand the existing business plan, and they may be more willing to fund the continuance of it under the existing price structure. Too many small rounds with new investors at different pricing will complicate the value story for future rounds.
If, however, you are currently in a strong financial position but are looking to fund significant growth in excess of what your current investors can provide, then initiating an external round of financing is your best option. This decision usually coincides with shifts in projected growth such as a surge in new customer contracts, new product launches, or the development of a new manufacturing plant. It can also have the advantage of bringing certain funds with perhaps more industry-specific experience and relationships to your team.
Know Your Story
Preparation is key to any successful round of financing. In particular, you should know:
1. How Long Your Current Cash Runway Is
By knowing your financial position, having cash reserves, and having a history of managing to forecast, you will engender internal confidence that the ask during the raise will be sufficient.
2. Your Value Proposition and Story (and How It Will Improve)
Knowing your story is important for selling your story to partners that will help you market your raise.
By sharing this story and knowledge internally across the executive, senior finance and operations teams, you can ensure your messaging remains consistent across all future external discussions. Consistent messaging will lead to a consistent platform from which offers will be based.
3. Your Relative Strategic Position in Your Industry
If you understand your strategic position, value position and key operating metrics, you will be better able to help market your investment effectively to potential partners.
4. (And Most Importantly) The Strength of Your Projected Financial Position
Recognizing the detailed purpose and impact of the financing will justify the total ask.
Additionally, an overall SWOT analysis of the business plan can be helpful in developing and refining the overall story. And to support the financial ask, development of a five-year financial forecast (with three years of historical information) will be generally required. Having these preliminary documents prepared in advance of initiating the raise is suggested as these are support for the overall story.
Choosing a Partner in the Series A Funding Round
After the financing path is chosen and the story has been developed, the next critical preparation step will be to decide if the company would benefit from the assistance of an investment banking partner to elicit new funding sources and to manage the process from pitch to signing.
This is where your existing partners can be of additional value. Your financial partners’ expertise and networks are critical at each stage of development. Having the right existing partners with contacts in the industry and in banking will aid you in getting access to the perfect next partner. This next partner might be a venture fund directly or an investment bank to source funds across a spectrum of financial and strategic partners during a Series A funding round.
Critical factors come into play when choosing between managing the process internally or using an investment bank, and then when choosing which investment bank. The arguments for using an investment bank include:
- a bank’s ability to bring potentially many more varied funding sources to the table,
- providing ongoing assistance with marketing,
- pressure-testing financial forecasts and valuations and
- disseminating ongoing due diligence alongside the Company’s story.
The value of their network and support is weighed against the cost of their network in the form of fees, minimum commissions, potential warrants and constraints such as tail and lock periods.
At each growth stage and new round of financing, it is important to prioritize choosing partners wisely. They will help guide you through the chaos of funding and lead you to success.
Prepare for Chaos in a Series A Funding Round
Most financings are stressful events, and the executive team needs to get accustomed to the amount of effort that often ends with rejection. Set the expectation early that only a few funds will actually get into the end zone.
Know that there will also be multiple asks and revisions to documents that will eventually fill the data room.
Interested in learning more about data rooms? Read our blog post: “Best Practices for Your Data Room in M&A”.
You will feel short-staffed during the raise. It is not uncommon to bring in interim financial management resources to assist with the development of analyses and work alongside the investment bankers. Use your financial partners as a resource. Leverage their expertise on what should and should not be included. They will help the company stand by the story and keep each message on point.
Preparing for Success in a Series A Funding Round
Focus on controlling the outcome now and later.
Remember that this is likely not the end. The executive team needs to remember that there will likely be future rounds of financing. And while one fund may have rejected the opportunity this round, they may be willing to participate in the next round. Continue to manage these relationships after the raise, as they will be beneficial down the line.
Knowing that this raise may not be last is also important when it comes to the ask and pricing. Don’t take more than you need. Control the valuation story. Remember that success may not be getting more than you want at the highest possible valuation right now. Future up rounds are better than down rounds. Success begets success.
By controlling the story, choosing partners wisely, enlisting additional skilled resources, and owning the distribution and amount of the funding ask, the company will be prepared for a successful transaction. 8020 Consulting’s Interim CFOs and our team of 90+ accounting and finance consultants can offer support through the process. Learn more:
About the Author
Danelle is an accomplished financial executive with over 20 years of diverse strategic, financial, and operational experience across industries including consumer products, pharmaceuticals and healthcare, manufacturing, hospitality and entertainment. Her focus has been to combine the day-to-day management of finance, accounting and treasury departments with various transactions / strategic initiatives including capital raises, debt refinancing, due diligence, and asset sales. She has led the redesign of management and accounting systems, overseen financial restatements, and developed new financial reporting and financial modeling. Danelle has taken direct CFO roles at two early stage CPG companies and with 8020 Consulting, Treasurer for Bolthouse Farms. Other consulting roles have included companies of varying size and industry, from being Controller of a $100 million specialty biopharmaceutical development company to Director of Reporting & Consolidations for an $8 billion hospitality company. An alumnus of PwC and FTI Consulting, Danelle holds an M.B.A. from the Fuqua School of Business, Duke University and a BA in Economics from the University of California, Los Angeles.