Fundraising needs time. Closing a deal can easily take six months. Add to that two to four weeks before any money arrives in one’s account (depending upon the contract). If there are no delays. Often summer vacations, Christmas, a death in the family (sometimes all three at once) can stretch the process by a couple more months. Complicated working relationships, ego issues, financial crises or summery weather can extend things even further. So leave yourself plenty of time!
2. Too slow
The “window of opportunity” is getting smaller and smaller in dynamic technologies and markets. Keeping up your tempo as you pursue investment is important. The investor interprets the speed of your reaction to due diligence questions as an indicator of your operative performance. So justdoit!
3. The Pitch
There are many kinds of pitches. The key question to ask is if the goal is to create investor interest or if you want to persuade him with a detailed approach. Deciding on your goal will dictate the level of detail you will use. You can find information on how to prepare a good investor presentation on the Internet. So focus on the highlights!
Both over- and underselling are mistakes. The main problem with overselling is that it sets the bar too high for your operative performance and leads to bad feelings among investors that can easily spread to other shareholders. Stocks rise when expectations are surpassed. So managing expectations (on both sides), without “hiding your light under a bushel”, is the best way to ensure long lasting, satisfying working relationship.
5. “Too early”
Actually, there is no such thing as “too early”. It is a way investors tell you that something is not quite right. Operative performance, the space, the founder’s haircut, whatever. “Too early” is a way for investors to avoid unpleasant discussions about why they are not getting on board. So understand your investors’ focus, the real reasons for their rejection and work from there.
6. The Investor
Usually you don’t get to choose your investors. Still, it is important to note that, after financing, the decisive factor in a company’s development is its ability to cultivate and maintain the working relationships that help it increase its value. Even in situations where you have a choice of investors, it is important to inspect them all carefully so you know whom you are dealing with and what financial focus an investor has. So company founders should exercise due diligence in regards to their investors.
7. The Valuation
If you are talking valuation, you are talking about millions. And it goes without saying that it is worth negotiating hard when millions are at stake. Is my company worth three or four million? From two perspectives, it is common for pre-money discussions to get heated. First, a valuation is an intermediate or temporary value (“funny money”) that often has only a loose relationship to a company’s exit value. Second, the impact of relatively small changes to a valuation on the cap table (e.g. + or – 500,000 Euros in the pre-money stage) is amazingly small. So the key question should be how one works together to achieve a higher exit value, rather than how one gets a higher (or lower) pre-money valuation during a financing round.
8. The Financing Volume
Financing rounds in the millions get and deserve the attention they receive. But without the right focus and traction in the market, too many resources can lead a company to unnecessary expenditures and cost structures that do not deliver the corresponding results. The result is a poorer company performance. For a firm in the early stages of growth, smaller investment volumes can often be more effective than larger sums. So be sure investment volumes fit your company’s stage of development!
9. The Negotiations
The biggest mistakes are made in a negotiation’s final stages. At the end of a negotiation, it is common for completely unimportant topics to take up far too much time. Highly improbable eventualities become the subject of tense negotiations. Then, when things go well, a new investor surfaces a couple of months later – and the whole negotiation process starts all over again. It is much more important to move your operations forward and to build a good and resilient relationship with your investors. So close the deal!
10. The Relationships
In our experience, the biggest mistakes made during the fundraising process are when negotiations damage or strain the relationship between the company and investor. When the parties can’t stand the sight of each other by the time the deal closes, it is safe to say that there is no basis for a close, trust-based relationship. So build up your relationships in the lead up to a financing round and don’t forget to have a closing dinner once you’re done!
Dr. Alex von Frankenberg is Managing Director of the High-Tech Gründerfonds focusing on hardware and software investments. Before taking that position in October 2005 he was responsible for spin-offs as Venture Manager at the Siemens Technology Accelerator (STA). Before joining the STA in April 2002 Alex was head of sales and marketing of an IT start-up. Prior to that he headed the Innovation Practice at Siemens Management Consulting. He started his career designing and implementing large IT systems with Andersen Consulting. Alex holds an MBA from the University of Texas at Austin (1992) and a PhD from the University of Mannheim (1997)