5- Investment Timeline
This article is part of
Accessing Finance in Jordan
A Guide For Entrepreneurs
Startups that manage to generate sustainable profits by relying on an entrepreneur’s savings or funding from family and friends are the exception rather than the rule. Nearly all startups will need to raise funding and approach investors at some stage of their growth. It is therefore critical to be aware of the process to approach investors and the timeline associated with obtaining funding.
1. Investor Mapping
As an entrepreneur heading a startup you will at some stage begin actively looking for funding. To begin, you will need to undertake a mapping of potential investors to approach. While this should be a structured and deliberate process, this does not mean it should be complicated—an investor mapping could be as simple as an excel sheet with a list of investors that are potentially accessible. It should include information on their:
🗹 Focus (sector or stage of investments) 🗹 Type of funding (including grant, debt, equity or mezzanine) 🗹 Average ticket size and typical round of funding 🗹 Average timeline to receive funding 🗹 Relevant startups invested in 🗹 Requirements (e.g. board representation) 🗹 Connection to facilitate contact 🗹 Location/contact details
You should have an idea of what else, other than funding, investors can bring to the table. Will they offer you expertise in the sector you are engaged in? Are their connections important enough, and can they open doors? Critically, will they have enough time to devote to your startup? All of this should be taken into account when evaluating investors.
Lead Investor: the first investor to fund a company as part of a deal, providing impetus to other, smaller investors to fund the rest of the deal.
Many investors are not willing to be lead investors (investors who are the first to fund a startup). Instead, they will need to know if there is an initial investor that has taken the risk and done the due diligence on your startup. It is important to know which investors are not lead investors before you approach them, otherwise you are simply wasting your, and their, time. You should instead be focused on identifying and securing funding from lead investors, who can more easily secure, or direct you to, other follow-on investments. Lead investors, in addition to conducting due diligence on your firm, can take a more active role in advising your startup, which is vital during your early stages of growth.
You should also have an idea of the reputation of the investors you are seriously considering, before approaching them. Some investors will be known for delaying payments to startups, negotiating severely restrictive terms, and even sharing confidential information with competing investee companies in their portfolio.
You should also be very wary of impatient investors seeking quick exits. One way to ascertain such information is to be active in your space, constantly networking and generating new connections.
Finally, you need to be aware of any conflicts of interest that can arise with a potential investor, and you will need to disclose any close relationships you have with individuals from the outset, in order to ensure legal and regulatory compliance. Even the appearance of conflicts of interest and the potential reputational damage they can cause can severely affect your startup’s chances of attracting future rounds of funding.
2. Approach Investors
Once you have completed your mapping, you can begin to approach investors. For some, you may be required and expected to go through specific channels, including submitting an application online. For others, you may be able to initiate a conversation through email, over the phone, or in-person. For such approaches, a personal connection through your close network is always more preferable to a cold call or an unexpected introduction. Your close contacts can vouch for you, and their strong reputation will help build trust early on in the process. Additionally, startups that have raised money from the same investor are usually the best introducers, especially if they are successful, as they will be more credible and trusted by the investor.
If investors are impressed, or at least intrigued, they will either invite you to pitch or will request your slide deck or business plan. Investors will want to see that you are on top of things and that you can deliver what they request in a short timeframe. If you take too long to schedule a pitch or send your business plan, an investor may perceive you as moving too slowly for their own liking. Our recommendations for producing a solid business plan and delivering a winning pitch are included in the ‘Writing a business plan’ and ‘How to succeed in your pitch’ sections.
You should be aware that you will probably receive dozens of rejections from investors before succeeding in raising funding. Don’t take rejections personally but instead try to solicit feedback as to why investors have declined to invest in your startup. Ask them to be brutally honest and be prepared for some very tough answers—investors are usually very experienced and can see your blind spots. Getting valuable feedback as early in the process as possible will save you further rejections, time spent, and heartache. Addressing it accordingly will get you closer to convincing another investor down the line to give you the funding you need.
4. Expression of Interest
If investors are still interested, or want to hear more, they will reach out to you. They could either request further clarification (this may happen at the conclusion of, or right after, your pitch) or express their interest to proceed with negotiations for funding. If investors are interested in funding, they will proceed with their due diligence. If, following the pitch, you still have not heard from an investor, follow up. However, If an investor takes too long to respond or does not respond in a set time-period, this may serve as an indication that the investor is not serious.
5. Due Diligence
The due diligence phase is when an investor will dig deeper into your financials, operations, viability, and team. Investors at this stage will look at your startup’s audited financial statements, your registration status, and debts, amongst other metrics, in order to assess the potential return on investment. They will also conduct background checks on your startup and team, including through client feedback, in some cases requesting references.
Investors want to assure themselves that your startup has a sound, financially viable, model that is being properly executed, and that the team behind the startup is honest. It is important that you are transparent with investors from the beginning. An investigation that reveals dishonesty or the omission of a highly relevant piece of information is sure to kill your startup’s chances to obtain funding. Besides, the due diligence phase is a good opportunity for you to improve aspects of your company critical for its long-term growth.
While some investors may begin negotiations with you right after your pitch and in parallel with the due diligence phase, many will opt to proceed with negotiations following the completion of due diligence. Obtaining legal advice at this stage is preferable, especially if you’re going through this process for the first time.
During the negotiation phase investors will want to know exactly how much you as an entrepreneur want, how you want it, and what they receive in return. Are you looking for equity or a convertible note? What is the portion of equity you will give up? Will they get board representation in exchange? All of this forms part of the ‘term sheet’,11 an initially non-binding summary sheet that sets out the key points of the financial agreement between the investor and investee.
You will need to understand the potential implications of any of the above and anticipate any scenarios to obtain funding that did not align with your initial request. Perhaps you requested equity and an investor wants to opt for a convertible note with periodic interest payments. You should also be aware of how much equity you are giving up and how this affects your management of the company. Hostile takeover bids are not uncommon and could boot out an entrepreneur from a startup they have worked so hard to build.
Once the term sheet has been signed, the agreement between your startup and an investor is formalized. It is strongly recommended that you work with a legal representative during this phase, as the finer details may become very complicated with long-term implications.
8. Disburse Funding
Once the agreement has been signed and the conditions specified have been met, funds are transferred to your bank account. This is known as the ‘financial close’. You should be aware that conditions will be attached to the funds you receive and that investors can, and usually do, monitor how funds are being used. While it is a significant milestone in your startup’s journey, it also represents a significant obligation.