It is a common founder complaint that Indian VCs & angel investors take a long time to close an investment. I believe so too.
However, the reality is that founders expend all their energy preparing their pitch decks and put in very little thought and time in the next steps that an investor will take if they are interested in the venture. It is in these crucial steps that the shine & sheen of the presentations start to wean, communications become sporadic and the “deal momentum” is lost.
Founders should understand that VCs do not have any incentive in extending the deal closure process. We know and realize that raising capital is an expensive affair and each day that is wasted because of some routine issue, is costing us too; in associate salaries, legal fees etc.
Thus, based on some recent experiences, I have prepared a list of 8 actions that founders should take BEFORE hitting the fundraising market.
1. Prepare a detailed financial model for fund utilisation
Founders should be ready to whip out the fund utilisation plan during the pitch and prove that the number they are raising is not pulled out of thin air. The first 2 years of the model should be prepared on a monthly basis and quarterly for the last 3 years. They need to prepare the model themselves and vet the numbers so that they can hold up to independent scrutiny. They can also bring in a financial professional to provide a sanity check on the model, but it is important that founders prepare the model ON THEIR OWN. Ideally, a founder should create at least 3 versions of the fund utilisation model:
1 that is based on the amount of capital the venture needs to have
1 that is based on the amount of capital the venture should have
1 that is based on the amount of capital the ventures would love to have
2. Clean up your cap-table
Founders should know the investors they have on their cap table. While pitching to a prospective investor, they should make it a point to clearly announce their cap table. Popping up surprises to the cap-table after a successful pitch will destroy investor confidence and invite additional scrutiny which (by design) will delay deal closure.
A piece of advice – please issue share certificates to all shareholders or demat your shares.
3. Know your numbers
Founders should make sure that their pitch and their financial statements show the same numbers.
A disassociation of 2% is understandable but that is the threshold.
4. Get a legal professional to prepare your company for due diligence
Founders usually spend lakhs of rupees in the process of fundraising for their venture. Therefore, investing 30-50k in hiring a legal professional to prepare an internal due diligence report shouldn’t be a problem. A legal professional can help in providing a long list of legal & compliance issues that need to be addressed. Founders can then start working on resolving those issues so that investor’s due diligence is smooth & hassle free.
5. Organise your files
Organising all the files i.e. employment agreements, manuals, rent agreements, licenses, audited financials, etc into physical and digital folders is essential. Founders need to be well-prepared when asked for records and putting them neatly into dropbox folders that are a click away will impress any investor.
6. Prepare a long list of references
Founders need to think of all the people that can vouch for them professionally, personally and socially. Let these people know that an investor could be calling them for reference. They should be ready with the list of these references for the new investors when they ask for it.
7. Pre-select your team for deal closure
To get an investment in a company, it is required that the company has a team of Company Secretary, a Chartered Accountant, a Merchant Banker and a Lawyer. Founders should pre-select a team of reputed professionals who will work on documentation & file requirements of the fundraise once the investor is on board.
8. Apprise your previous investors, mentors & accelerators of your fundraising plans
If the founders have mentors, if their venture has previous investors, or if it is part of an accelerator, it is imperative that they inform about it to the investor they are pitching to, BEFORE hitting the fundraising circuit. It also helps to get the approval of the board for the fundraise (if they are independent or investor directors) before any official fundraising pitches are made.