Blog

September 22, 2011

Checklist: How to Prepare for a VC Fund Raise

I recently wrote a post with some tips on avoiding a busted VC deal.  One of my tips was to be ready for diligence before you sign the LOI.  Here’s some more thoughts on getting ready.

The
key to a successful and pain-free venture capital raise is to be
informed, prepared, and engaged. To be informed, you need to regularly
speak with bankers, VCs and lawyers that cover your space.

Start
fund raising 12-18 months before you need the money. You will need that
time to sift through and qualify various VCs. Also, spend a year
qualifying VCs by building relationships and getting to know them well
enough to qualify the ones you like from the ones you don’t.  Picking a
VC is not about the money (yes, all VC money is green).  It should be
all about picking the right firm with the culture and expertise that fit
your company’s culture and aspirations.

During that courtship
period, don’t shut out VCs. Take their calls and give them an overview
of the business. You are probably getting calls from VC analysts already
(if not, then you’re not promoting yourself enough). When you do, take
the call and ask for a call with a partner.  Keep that dialogue open on a
quarterly basis.  You can’t be too busy for that, as all it takes is
setting a pace and scheduling a call or two a week (maximum).

Next, hire a VP of Finance
(if you don’t already have one). I’m a huge fan of hiring a senior
finance executive sooner than later. A solid operating CFO is a blessing
to an early stage CEO. (For more details, check out this post titledThe DNA of the CFO.”)

Six
months before you’re ready to begin a fund raise process, start putting
together the investment package. This should include:

  1. Company presentation: 
    You don’t have to write a business plan, although it can be helpful. 
    Build a PowerPoint presentation and make sure it’s no more than 20
    slides long. Avoid high-level fluff. Let each page be insightful and
    meaningful. Don’t worry about making each slide pretty. The more detail
    the better.  Don’t make your product the focus on the presentation!  Tell a story. Start with the company and its aspirations — the WHY (check out this talk (and book) by Simon Sinek).
    Then talk about the customer pain that you solve and how. Then discuss
    the market and competition (don’t you dare say you don’t have
    competitors. If you do, you’re either foolish or lying).  Then go into
    the product and how it differentiates. Then talk about the team. Then
    your plans and where you need help.
  2. Company financials:  You don’t need an audit by an accounting firm to raise a round. But you do
    need to have a full set of financials (they don’t need to be GAAP
    compliant). At a minimum, have full set of financials per year since
    inception that include the P&L, Balance Sheet and Cash Flow. In the
    P&L, make sure to breakout bookings from revenue. And for each,
    breakout the types (e.g. SaaS bookings vs. perpetual bookings vs.
    services).  Make sure to show your gross margin. Breakout expenses by
    function (R&D, Sales, Marketing, Services and Admin).
  3. Company economics:
    this is where you highlight key metrics that are critical to running
    the business. Pre-funding, startups tend focus on cash flow.
    Post-funding, you will be tracking the economics of the business. Think
    about the three or four key metrics that are critical to scaling your
    business. For SaaS companies, we look for metrics like new customer
    booking growth, the economics of new customer acquisition, and existing
    customer growth and churn.  For more on this, check out a couple of
    posts I wrote in the past: “Build a Profitable SaaS Business” and “The CEO Imperative – Build your Operational Control Panel“.
  4. Prepare for legal diligence:
    at this point, you should retain a lawyer that specializes in VC deals.
    Don’t shy away from high-tier law firms. Ask around to other companies
    that have raised capital about what lawyer they used.  Having a good
    lawyer is much more important than having an investment banker (in fact,
    I don’t recommend using a banker to raise money, but you should have
    one for consultation.)  Have your lawyer prepare you by pulling together
    what is typically required in deal legal diligence. This would include
    your current option plan, employee confidentiality agreements, IP
    documents, incorporation docs, board resolutions, customer agreements
    and contracts, software licensing agreements, etc.  Have all the material ready and saved in an online deal room.

Here’s OpenView’s pre-term sheet due diligence template. It should give you a good start on items 2 and 3 above.

Pre-Term Sheet Due Diligence

Company Financials

  1. Company’s definition of Booking
  2. Company’s definition of Revenue
  3. Monthly,
    for two (2) fiscal years back and one projected forward: Profit and
    Loss statements.  Including quarterly revenue in bookings and recognized
    revenue (e.g. US GAAP). Costs on P&L to be broken out by key
    operation functions (e.g. Marketing, R&D, etc.) . If you are not
    accounting using GAAP standards, please specify and provide accounting
    assumptions.  Please provide in Excel format.
  4. Monthly, for two (2) fiscal years back and one projected forward:  Cash Flow Statement  . Please provide in Excel format.
  5. Most Recent Balance Sheet. Please provide in Excel format.

Company Sales Performance

  1. Monthly,
    for two (2) fiscal years back and one projected forward: Recognized
    revenue broken out by type: e. g. License, Subscription, Maintenance,
    Service, Other . Please provide in Excel format.
  2. Monthly,
    for two (2) fiscal years back and one projected forward:  GAAP Revenue
    broken out by Product . If you are not accounting using GAAP standards,
    please specify and provide accounting assumptions.  Please provide in
    Excel format.
  3. Monthly, for two (2) fiscal
    years back: Bookings by customer, broken out by product, by type of
    revenue (license, subscription, maintenance, service, Other) – customer
    names are not important at this stage, if sensitive . Please provide in
    Excel format.

EXAMPLE (Please provide in Excel)

Account ID

Contract Signed

Booking Total

Contract Term

Date of Contract Cancellation

1

1/25/2006

$500

Monthly

Jul-06

2

4/4/2006

$350

Monthly

Jul-07

3

4/10/2006

$4,200

Annual

May-06

4

6/20/2006

$3,000

Annual

Jun-07

5

6/30/2006

$495

Monthly

Jul-06

6

7/19/2006

$3,000

Annual

Active

7

7/27/2006

$3,000

Annual

Active

8

8/10/2006

$500

Monthly

Active

4.  Total
cost to acquire a single customer: trend by month with associated sales
and marketing expense broken out . Please provide in Excel format.
5.  Average
one year value of a single customer (Average Annual Booking) and
estimated total lifetime value (=Average Gross Profit x Estimated Number
of Times Customer Renews/Reorders) . Please provide in Excel format.
6.  Monthly
or quarterly, for two (2) fiscal years back:  Bookings by sales
person/unit, broken out by revenue type, against quota. Please provide
in Excel format.
7.  Monthly or quarterly, for
two (2) fiscal years back:  Channel Sales, booked revenue by channel
partner, by customer – broken out by revenue type, against plan . Please
provide in Excel format.
8.  Number of deals completed and average deal size by month for past 12 months . Please provide in Excel format.
9.  For next two quarters or next fiscal year: qualified sales pipeline . Please provide in Excel format.
10. Breakout of each individual customer revenue by month . Please provide in Excel format.
11. Billing options (e.g. upfront , monthly, quarterly, annually, transaction based, etc…)

Corporate Structure

  1. Full-diluted Capitalization Table, with details/terms of previous financing rounds . Please provide in Excel format.
  2. Key management current compensation and projected compensation changes post-investment . Please provide in Excel format.
  3. Current Board
  4. Corporate entity and legal structure

Firas Raouf is a Venture Partner with OpenView Venture Partners.  You may find this post, as well as additional content on OpenView's blog located here.  You can also follow Firas on Twitter (@fraouf) by clicking here