Last week our company officially closed the book on our first round of financing. We couldn’t be more excited to dedicate our full attention to product development and other elements of the business.
This was my first time at the helm of a startup’s financing round and I’ve learned quite a few lessons, large and small. Here are some of the most important ones:
Be Prepared to Spend More Time Than You Expect Raising Capital
In January, I mistakenly assumed that we could close on financing in less than three months. Erring on the side of caution, I planned for a full five months until funding. If anything, this seemed perfectly prudent; we were involved in a series of mid-stage conversations with potential investors, who were expressing strong interest. We had began fundraising in October, and, having recently resigned from my full time position in order to dedicate my time to the business, I felt confident that we would soon cross the finish line.
The process, however, ultimately took much longer than any of us had anticipated; it wasn’t until late October– nine months after January, that the round was fully closed and funds released to the Company’s bank account. While we had letters of intent, term sheets and other prerequisites worked out by the Spring, the the actual nitty gritty work of finalizing the agreements dragged on for weeks and then months.
In all, from first pitch to check, the entire process of raising capital for our young business took about a year, two-thirds of which saw me working in a full time capacity.
Other startups have a wide range of experiences when it comes to fundraising– some are able to do it in as little as two months, while others may take as long as two years. The range of variables that tended to dictate these outcomes include:
- Size of the full time staff
- Maturity level of the business (pre-revenue concept vs post revenue operation)
- Experience level of the founders
- Size of round
As a rule of thumb, I’d advise other first-time entrepreneurs to plan for their round taking about twice as long as expected. Not only does this entail mental preparation for the long slog, but also planning for ongoing product development expenses and the continuity of operations during the fundraising period, not to mention contingencies for the salaries/living expenses of the founders.
Organize Legal and Corporate Documents Before Funding
The fact that we had to legally form our corporate entity and reach agreements between the founders concurrent with closing greatly complicated the process and probably accounted for at least two months of additional time.
Any responsible investor will ask to see the following prior to financing:
- Basic Incorporation Documents: Certificate of incorporation, bylaws, company charter etc.
- Founders Documents: Basic agreements between the founders that outline the ownership structure of the company, including vesting agreements and other stipulations
- Intellectual Property Agreements: Documents affirming that the Company either owns or controls all the relevant intellectual property
If possible, it’s best to take care of these elements prior to fundraising. It will simplify the process, and demonstrate a degree of sophistication that will impress prospective funders.
Utilize Your Existing Network
In the early days of our search, we reached out to over 100 institutional and angel investors. In the end, however, our funders came either directly or indirectly from our networks. I met two of my investors during my time at the Downtown Brooklyn Partnership, and the other due to my involvement with Transportation Alternatives, a New York City based smart transportation advocacy group.
Upon reflection, I’ve fully realized that the most fruitful conversations came from those who were connected to me somehow, either via a shared professional experience, a shared interest, or a mutual acquaintance.
It can be off-putting for some entrepreneurs to pitch their ideas to colleagues or professional acquaintances, but the returns can certainly worth it.
Make Sure To Add Padding
A year ago, when we began our search, our ask was bare bones; we just needed enough to build and assemble a prototype. I assumed the less money we sought, the easier it would be to secure interest from investors and the less equity we’d have to sacrifice in exchange for the capital. During our conversations, however, prospective investors encouraged us to put in place a significant amount of extra money in our ask to account for cost escalation and unplanned expenditures.
We’re happy we did.
Our product development costs rose as we began to flesh out all the details associated with designing, constructing and operating our infrastructure. The cost of insurance, for example, was significantly more expensive than we originally budgeted, as were other expenses related to marketing and logistics.
Padding a budget, asking for more resources than the absolute minimum, provides the breathing room a young company needs to focus on product development with the stress of having to raise additional capital or cope with a narrow cost margin. Fundraising is a long and arduous process that requires a significant amount of a startup’s precious bandwidth. In considering an ask, founders should ensure that they’ll have enough funds to comfortable last them awhile, so the focus shift to the core elements of the business.