Three of the companies I’m working with are now approaching the fund raising process. Often with these entrepreneurs, there is a lack of exposure and experience to how the investor process works. Here is an (edited) excerpt from an email exchange regarding some details and expectations from the fund raising process, and about an upcoming meeting with a prominent angel investor:
I’m glad I broached the subject. Thanks for the detailed and insightful response, Dave.
DSHEN: I consider it my job as advisor to teach you as much as possible and get you up the curve as fast as possible to set your expectations correctly, to prepare you for the best and the worst, but also to have a really fun time at all this ;-).
What’s a likely scenario in your mind?
* Send term sheet and 1-pager immediately
DSHEN: I think this is a good idea. It will help keep the mtg shorter and you and he can focus on his real questions.
* Meeting on Thursday
DSHEN: Present your deck, field his questions, pray for positivity.
* How many more meetings until we close a deal?
DSHEN: No idea. It will vary from investor to investor. Generally if you have a group of investors, you’ll get a general “I’m in” and you should add them to your list. You’ll always have to check back with people to make sure they are still “in”. Sometimes they may drop out. This motivates you to close funding as soon as possible.
By close funding, I mean:
– accelerate as much as possible meetings with investors. Do not sit around not fund raising, even if you have a lot to do. I suspect that the burden will fall on your US person to do the fund raising since she is here in the US. It will be really tough. You’ll have other commitments and try to field them, but if you don’t go as fast as possible, this will drag on for months. The longer you wait to close, the higher the possibility that somebody might drop out, thereby lengthening the process even further.
– set a date for yourself to close by. Set a monetary minimum and maximum goal. Setting a minimum both mentally and financially will mean you will be faster in deciding whether you want to stop fund raising, close the funding and collect the funds and finish the massive amount of paperwork, and get back to work. BTW, in a good scenario, you may actually have more investors wanting to give you money than your maximum and may want to decide to take that. This is actually a harder decision than it looks, as it affects valuation and how much of the company is sold to investors.
– the closing process is one of document preparation. You’ll get your lawyer to expand upon the term sheet into the relevant docs. Since you’re doing a preferred angel round, you’ll need a stock purchase agreement, an investor rights agreement, and some others. You’ll also need to change the articles of incorporation.
– the closing process is one of gathering signatures. Like herding cats, you’ll need to help get all the signatures back to Monty. I would recommend getting an eFax account. It will help you electronically pass around faxed signature pages versus shuffling paper. I have one and love it as all incoming faxes get emailed to me as PDFs. (by the way, it works great also as a document scanner; you just throw the doc into a fax machine and fax it to yourself).
– the closing process is one of collecting money. You’ll be surprised at how hard this process can be. Usually, your law firm will setup an escrow account where the money will go to first. This is to prevent you for going to the Cayman Islands with our money if we were to send it directly to your bank account (haha). Once the money is collected, he’ll run all the docs, get all the signatures, get everything filed, and then the money goes into your bank account.
– after all this is done, you’ll send back to everyone their copy of the signature pages. Your law firm might prepare a nice notebook with all the docs in it, or not. You may want to pay for that or maybe it’s part of the package.
And lastly, we get our nice Preferred Stock certificate in the mail from your law firm a few weeks later.
* Dave, it is my understanding that if this investor is in, you’re likely to close as well?
DSHEN: Actually my commitment to you is not dependent on that. I have already said that I would invest and now it’s a question of exactly how much I will put in, and a final review of terms. Also, I will need the advisor agreement signed with you since that’s how I operate, which is I require that I be an active participant (advisor) with any firm that I invest in, on the assumption that my help will raise your chances of success than without my help, thereby somewhat protecting my investment.
BTW, you’ll find that some investors won’t invest unless somebody else goes in too. A lot of people go on the opinions of others, especially those who aren’t as good at evaluating companies in the internet space. Some won’t go in unless you reach a certain threshold of dollars committed, also as a way to gauge others’ confidence in you. Be prepared to deal with this in your fund raising travels.
* Would we close with just you two, or would we have to wait for other investors to come on board as well?
DSHEN: Most likely with a dollar amount of $1MM, you’ll have to have other investors at the angel level. Unless you find someone who LOVES you and what you’re working on, AND they are richer than you or I can imagine (there are a few people like that in the valley). You already have a small list of people who have verbally committed; ask your partner about that and I believe I am already in that list.
I understand that these things are not entirely predictable, but we still need to have a clear plan, with milestones and tasks, so we know what we’re aiming a and so we can track progress and change our strategy when things don’t go as expected, and so we can plan for our finances in the meantime.
DSHEN: Yes, hence my comment on setting a closing date. You should be doing regular check-ins, on progress and keeping a list of investors (ie. Contact info and contact progress (ie. Sent term sheet, no response, got warm response, referred me to his buddy, etc.), amount committed or not, did they refer you to someone else so you can thank them later, how did the mtg go?, were they assholes or not :-), etc.)
The fund raising process is going to double your workload, maybe even more.
Be prepared for sleepless nights for a long time, a lot of frustration at not returned calls/emails, watching the process go super slow, etc. And then be pleasantly surprised if you are able to close early :-).
Last word on this fine cold NYC morning: find investors who are going to help you if you can. Taking non-helpful money is OK, but not as nice as getting someone involved in your company who has skin in your game and can also help your business, like leveraging their list of contacts. Sort of like when I invest, I am doubly motivated to help you than if I’m just an advisor.
Some other notes about investors:
We’re dealing with a large sum of money. $10K, $50K, etc. are especially large sums of money for angel investors. You’ll find that money changes people and there will be some people that will say they will give it to you and then pull out at the last moment. It’s frustrating and you’ll wish that people mean what they say, but be prepared to encounter some who won’t be able to part with their cash, even if they insist that it will show up tomorrow.
If a few pull out, this could mean that you won’t be able to close and you’ll have to go back out and raise more money.
Keep the number of investors as low as possible. There will be people who can’t stop bugging you about how their money is doing. This is also related to the previous point; this sum of money is a large amount of money and there will be people who will be overly paranoid about losing it. Experienced angels won’t act like this since they’ve done this before, but the likelihood of it happening with unexperienced angels is fairly high. So keep the number of investors low; it will reduce the chance of this happening and reduce the chance of added distractions in keeping investors happy.
The fund raising process can be filled with frustration, consumer incredible amounts of time, and be extremely rewarding building your confidence and your rolodex with each meeting. Have a positive attitude through the whole process, don’t give up, and have a great time with it.