The Secrets of a successful financing campaign (Part 3) – Understanding the Financing Ecosystem

In line with the precedent article, one must understand the world one is entering into before taking a journey: in our case, the world of investors…

It’s like travelling to a foreign country: one need to understand the environment, the culture, the dos and don’ts, the language, etc…, and if the project holder doesn’t, it would surely be a good idea to hire a guide or at least a translator!

We will come back to that at greater length later.

Thus, the first point to understand about the world of investors is that INVESTING IS A BUSINESS!

Whether it is debt financing (mezzanine, convertible notes, etc…) or equity financing, it consists in “giving“ funds in exchange for a return: the Famous “Return On Investment (ROI)“

And like everybody else Investors want to do business… they need to find opportunities just as bad as Entrepreneurs need to find funds… in other words, each party needs the other one, the benefit is 100% reciprocal!

This said, it’s naturally easier to find investment opportunities than funds, however, it’s not uncommon to see Investors stressed as the end of the year comes close and they still have funds to invest somewhere…

The second point to never forget is that INVESTOR’S TIME IS LIMITED!

This means that you will have a limited amount of time to catch their attention, so, better use it wisely, especially since, as the saying goes, “you will never have a second chance to make a first good impression“.

Consequently, it is MANDATORY to be well prepared before-hand!

The third point to keep in mind, is that INVESTORS ARE PERMANENTLY PRESENTED DOZENS OF INVESTMENT OPPORTUNITIES, so your project needs to be well structured and your presentation needs to be more convincing than the other investment opportunities that are brought to them.

It is however important to make clear that it doesn’t mean you have to present the project with the highest ROI. It’s not a contest in term of which project has the bigger one…

Indeed, Investors tend to prefer likeliness to happen over ROI size!...

As stated above, one of the key factors of readiness for something is the ability to anticipate on the future events.

In the case of fund raising, this starts with getting familiar with the “cycles of investment“...

Indeed, financing needs generally happen in cycles at defining moments of the company’s life, like the company inception, the need for a Proof Of Concept, the need for a working prototype, the product launch, the market validation and the need to scale-up, etc…

Each of these milestones generally relates to a specific “round of funding“ which bears a specific name that one must get familiar with: for instance the funding round at the company ‘s inception is called “pre-seed funding“, the round related to the development the concept would be called “seed funding“, the round relating to the desire to scale-up would be a “Serie A Funding“, etc…

It is very important to know the round you are in and its name because, as we will cover later, investors tend to specialize into a specific funding round.

It is equally necessary to anticipate how many funding rounds you will go through as you need to prepare each Investment Proposal accordingly.

For instance, “selling“ an investor that the 20% of equity you are offering for a XYZ Euro investment, will translate into a 350% ROI at a 5 years exit time, requires that you have taken into account the dilution that the arrival of another investor at year 3, for instance will create.

Another example, if you are considering offering stock options (the possibility for employees to buy shares of the company at a pre-set price enabling them to benefit from the increase of the company’s value thanks to their efforts), you must take it into account in your Investment Proposal as this will also create a dilution of the existing shareholders whenever it will happen.

Last but not least, as the % of equity you will offer to each round also (but not only, by far) depends on the overall amount you will have to raise, thus it is critical to have calculated this total amount in advance to properly prepare the Investing proposal for each round.

This is done through a “Cap Table“. A Capitalization Table is a table that provides an analysis of the percentage of ownership, equity dilution, and equity value of a company at each funding round. It will give you a global vision of what equity is own by each shareholder throughout the successive dilutions.

We are just scratching the surface of the general notions and related vocabulary, that must be mastered before taking a fund raising journey.

So stay tuned for more tips, or contact Fred by mail, write a comment here-below, or just click on the Chat button to further discuss this topic... or any other 😉