As a startup founder, I frequently receive questions from friends, family, acquaintances, about how this mysterious fundraising process works. In short, raising venture capital funds is a business deal in which you exchange equity, or a percentage of company ownership, for the capital your business needs to grow, in the form of investment funds.
Rapidly just raised our Seed round in February and now I am currently in the process of raising our Series A in the midst of COVID-19 and a faltering economy. From the early days of Rapidly, I knew the importance of enlisting help from a trusted accountant and I am now able to utilize our organized financial recordkeeping in my venture capital fundraising process.
The Importance of Financial Planning Before Raising Capital
As part of the venture capital process, it is mandatory that you understand your numbers, your growth rate, your burn rate. You should have a sense of what type of historical growth you need to be able to show in order to get a VC who is going to be interested in funding your company.
Founders want to quickly establish your cadence and relationship with your accountant or bookkeeper. Every company has to have this: either a third party person handling this, or you have a CFO function. You want to have a pulse on managing these things, with tracking revenues, costs, cash flow. Record keeping and paying your taxes are of utmost importance, for example with payroll, for both for due diligence by investors and general compliance purposes. Not getting your ducks in a row can have longer-lasting effects. Just this year with the Paycheck Protection Program (PPP), many businesses were ineligible due to having their employees classified as contractors rather than W-2 employees.
You want to have an accountant on your roster as early as you can, whether that’s when you incorporate your company, get your first paying customer, or hire your first employee. From Day 1, you should think about your financial recordkeeping and prepare for the future of your business by staying up-to-date with your books.
An added benefit of having a tax and accounting professional on your side is that they can bring their expertise of which bookkeeping and payroll software are going to be best for your business, rather than you trying to compare 10 different options.
Your Due Diligence Essentials
You want to have your base level due diligence items all together and ready before reaching out to investors. Even though you’ve prepared all documents before reaching out to investors, provide only what is asked for, when it is requested.
You will want to wait until after you receive a term sheet from investors to provide company financial information and documentation. You only want to show your company’s proprietary information to those who are serious about investing, not just someone who is considering investing in a competitor and wants your competitive intel. Prior to a term sheet, you would want to answer base level questions that they request, but not necessarily share your documents. I use Carta’s Deal Rooms feature just for transferring documents to potential investors.
Required Due Diligence Items
Capitalization Table with a summary of all shareholder equity
Profit & Loss (P&L) statements with records of revenues, costs, expenses, in a given time period
Cash Flow statements with a summary of all incoming transaction through operations, investments, and financing
Balance Sheet with the company’s assets, liabilities, and shareholder equity
One model if the business continues to grow month over month for 12 and 24 months
A second model if the business does not make any further month for the next 12 months, illustrating how long the business can run if things go south for our business during this time (very essential during a post-COVID world)
Cohort analysis from your customer data
Paid customers/users month over month
New users acquired month over month
Month over month churn
Month over month retention
How to Choose Your Accountant
Timeliness and a good relationship with your accountant as additional questions or last-minute requests from investors come up during the fundraising process. This is why it’s best to have everything prepared before you begin your fundraising round. Shameless plug here Rapidly is a great starting point to start a long term relationship with a vetted accountant.
If you’re new to working with an accountant, you will want someone who has experience with startups, understands your revenue model, and your specific vertical. If you’re early stage and raising venture capital, you’re most likely not yet profitable, and your accountant should understand that in the short term your expenses are going to be more than your revenue.
Your accountant should be able to include stories from your user data (revenue, acquisition costs, churn rate, customer lifetime value, burn rate, revenue pipelines) in their financial modeling numbers of historical and projected KPI’s. Timeliness and a good relationship with your accountant as additional questions or last-minute requests from investors come up during the fundraising process. This is why it’s best to have everything prepared.