For investors, the involvement and financing of startups is part of their daily business. Founders gradually grow into the search for investors. We advise and assist startups with the search for investors up to Series A, hold workshops to transfer knowledge through training and provide founders with platform with virtual labs, online trainings and programs along the investor-readiness process.
Growth needs cash
If a startup or an SME is doing well and further expansion is needed, it can be difficult to meet the cash needs of the company’s own cash flow. Just then, the time has come to look for external funding. However, this project can not be started overnight – the search and preparation require a certain lead time.
Alternatives to financing
The guarantees given by banks on lending to start-ups and SMEs are “unbearably high”, as was criticized only in 2014 during the Forum Alpbach. The first point of contact “Friends & Family” is usually already exhausted. Remain the opportunities to use crowdfunding or to inspire a / strategic or financial investor from their own company and to motivate them to get started. Anyone who plans the search for investors has long been in contact with potential donors, even as a specific funding gap was still in the distant future.
TIPS AND OUR APPROACH
Prepare investor talks
All documents are collected in an information memorandum and presented to possible investors as a document. All the information contained in the memorandum is summarized in an attractive teaser – this usually consists of an address and a management summary. It covers between five and 20 pages.
It is particularly important to be aware of the duration of the preliminary phase of the search for investors as an entrepreneur. This is usually two to three months, because the contents are well worked through.
Which documents are needed in advance of investor discussions?
It is the translation of the corporate strategy into the language of the investors. It provides a comprehensive view of the company and provides transparency on how future value generation can be achieved. Ultimately, she provides the arguments in the form of a sales prospectus and answers the question of why an investor should get involved.
What proportion of an investor should receive at most, how could it develop in the future, how should the process look like in terms of time and content, during which investor discussions are conducted? Which type of investor would be preferred? Which rights and obligations are NoGos? These topics are fixed in the investment strategy.
In a business case, profitability, balance sheet and cash flow are forecast and argued for the next 5 to 10 years. Internally, the owners will calculate different scenarios in order to be able to agree on a realistic and better formulate their expectations towards the investors.
The business valuation is calculated on the basis of the business case. Again, there are scenarios for the individual parameters that should be discussed and fixed. A sanity check on multiple comparable transactions and similar companies is a minimum requirement for a good rating, as well as professional processing.
Addressing investors – the search for investors
Research the individual potential investors, their priorities, deal sizes, what they can contribute, whether the regional focus fits, contact details and what discussions have already taken place. If you have not made contact yet, find out if there are any common acquaintances / business contacts and try to get a referral with your teaser.
If you address investors directly without knowing the person (cold address) or without being recommended by another person (warm address), the probability of investing is only very low and is 0.02%, as Fabian Westerheide makes clear.
It is even better, of course, if one is addressed by investors themselves. Some founders recommend keeping their own space on the website and making information transparent. If the PR is good and the company grows fast, it may be that one of the lucky entrepreneurs, who are addressed by investors. Success probability in comparison: 1.6%.
If an investor is interested, the first discussions begin until the letter of intent is drawn up. Roughly agree on the key points of the negotiation and clarify whether the chemistry fits well between investor and entrepreneur. Only then does detailed negotiations take place, which are supported in detail by experts such as tax consultants / auditors and experienced lawyers.
A tip for a successful negotiation: Keep in mind at all times your best alternative to the currently negotiating partner. The so-called BATNA (“best alternative to negotiated agreement”) is an important part of any negotiation preparation, is likely to change more often during the process and is a key factor in the success of the negotiations.