Start-up Financing is not just about raising funds, it is a holistic process that involves proper business planning with thoughtful growth targets, deciding business valuation as per the current market standards, planning potential exit options for investors, calculating financial returns for investors, negotiations with investors, evaluating and deciding appropriate term-sheet clauses, and finalizing shareholder’s agreements.
Investors do not only invest in a particular business model based on a preferred sector theme, but they also judge various other critical aspects affiliated to the business, be it a team, revenue model, unit economics, promoters’ vision or competitiveness, growth plans, execution potential, exit options, or expected financial returns. Even minor areas like promoters clarity of thoughts, communication ethics, expressiveness, presentation, passion, and knowledge of the industry and competition, can set the investors off the process.
Knowing the complexity as well as the limited success possibility in start-up financing, financial advisory firms play a crucial role in managing the whole financing process efficiently.
The main role of financial advisor is to create a strategic roadmap for the start-up and help it in achieving its growth plans. Due to their regular nature of this work, financial advisors very well understand the expectations of investors. Financial advisors bring together a wide range of industry expertise and provide a hand-holding to start-up throughout the process. They help start-ups in summarizing their winning investor pitches for Venture Capital and Private Equity investors, and also guide them in various other financial matters such as developing financial model with right growth drivers, calculating the business value, effectively interacting with investors, soliciting term sheet from investors, support on finalizing shareholder’s agreement, support on transaction structuring, and finally a transaction closure.
At the inception stage of the financing process, financial advisors envision the whole process from the start to end in their mind and accordingly divide the whole process into multiple sets of actions. They start with basic steps and work up the flow, for e.g. they work on getting deal perspective from 6-7 funds, perform upfront analysis of the business, position the business rightly, and structure a business plan with a relevant pitch. Secondly, they work on connecting with investors beyond the usual suspects, also introduce domain specific reputed angels to add greater comfort to funds, bringing onboard strategic investors who can add value, and most importantly create a consortium of investors to mitigate rejection risk. Then, lastly financial advisors work on curating the funds, bringing the interested ones on board, create a bid process to achieve target valuation, create potential backups if lead investor backs out during due diligence, etc.
Financial advisors make sure that the whole process is executed within a reasonable time frame, as this is crucial, given the pace at which business environment changes and the limited cash runway promoters have for business.
The fundraising process is the real test for the start-up promoters and as well as for the financial advisors, as the amount of strategies, tactics, and psychological and factual work play they put in, can turn the whole dynamics of the deal into success.