After having spent a fair amount of time over the last decade during my corporate journey in evaluating businesses for investments, raising funds from investors for some businesses and having made over 25 angel investments in my recent avatar as an angel investor, I thought of sharing a construct with the founders which they can use to prepare themselves for Growth Capital (Series A/B/C, etc. ).
I have created the following sections in the Framework:
A. Investors’ Expectation and Process
B. Criteria of Founders to choose Investors
C. Pitch For Investment
A. Investors’ Expectations and Process:
- Given the multiple choices that an investor has in today’s world, they want to invest in a company that aligns with their Investment Philosophy, returns an IRR of ~20 to 25%, and provides them a high probability of exit over a period of 4 to 6 years.
- Some of the key questions to which the investor may need answers could be the following :
Part 1:
- Aspirations of the Founders for the Business
- Purpose and values
- Size of the opportunity
- Understanding business drivers
- Ability to scale profitably and go to market
- Competitive intensity and entry barriers
- Risk, challenges, and upsides
- Ability to execute the plan and operating philosophy
Part 2:
- Cash Flows and Unit Economics
- Investors on Cap Table
- Valuation
- Exit to Investors
- The process followed by Investors to assess the above
- Multiple meetings with Founders and listening to their stories based on the above. Generally, they may want to get convinced on Part 1 first, before investing time in Part 2.
- Outside-In review of the business by speaking to domain experts and ecosystem.
- The investor builds the thesis on the business case including sensitivity analysis and business scenarios. This presentation is made to their Investment committee for preliminary approval before committing further resources and time.
- Offer term sheet to founders and then start diligence (Commercial, Legal, and Accounting). In my view, if the investor is knowledgeable, understands the domain, and has a hunger to close, the probability of investor backing out is low. The investor will back out if there are some red flags with respect to integrity and, transparency, any material impact on business, regulatory issues, and non-compliance.
B. Criteria to choose Investors by Founders
Here are some high-level perspectives on the framework to choose an Investor partner whether Strategic or Financial.
The founders must try and define the role and expectations of the investors and the outcomes they intend to deliver to the investors. Given that the investment is like a marriage amongst two institutions, there must be a “Dilse” Connect.
Founders may need to spend a fair amount of time researching the culture, chemistry, and investment process of the investor to align aspirations and outcomes with investors for a wonderful relationship.
Here is an illustrative framework that may help the founders close out faster to get the highest Returns on Time Invested (ROTI).
The framework could be in two buckets as under:
- Alignment of Vision, Values, Culture, and value add
- Hunger and time to close
There must be a separate analysis for Strategic and Financial partners and each of these attributes could be rated on a scale of 0-5 to bring in some objectivity in the decision process.
- Alignment of vision, values, culture, and value add
- Understanding of partner’s DNA and their alignment of thinking with founders and the business story.
- Are they long term and patient investors
- Their track record in the start-up space and feedback from Eco-System
- Value add in helping the founders create scale and value creation
- Assessment of the partner’s representative (if any) and her chemistry with the founder and status in the firm
- Commitment to invest in future rounds and help in fundraising
- Criteria to assess Hunger and time to close
- The level of Founders engagement and interaction with decision-makers
- How deep is the Investor Partner’s understanding of the Business and Domain
- Is the interest from Investor inbound
- Any conditionalities which restrict the freedom of Founders to run the business and rationale behind this ask
- Founder’s gut on how close or hungry are they for partnering with them
- Understanding the decision-making process and how quickly can they make the decision and Valuation metrics
As far as possible make as detailed a term sheet to avoid any nuances while detailing shareholders’ agreement. Founders must have the data room ready to avoid any delays from their side.
It is important to note that even if there is a competitive process, the intent of the founder must be to ensure a Win-Win by leaving something on the table for Investors.
C. Content for Pitch For Investment
Founder/s’ Story: This may cover soft aspects as well as hard data including vision, purpose, values, past track record and grip, and 360° view on the business including SWOT and ability to profitably scale and execute. Speak about some examples of innovation, risk-taking, process orientation, scale, go to market philosophy and operating guidelines.
Build a repository with examples, only a few may be covered in the deck.
An illustrative list of other items to be covered in the Pitch:
- Management team and Advisors
- Belief on size of the opportunity and why
- Plan to scale
- Target customers, product offering, demand creation, and brand building
- Ability to compete and unique value proposition
- Current and future capability build-up
- Culture of innovation and experimentation examples including IP
- How we manage the business
- Tech backbone, AI/ML, IoT
- Upsides – Businesses
- Building Ecosystem and Alliances
- Unit economics, optimization of the use of assets
- Risks, challenges, and mitigation
- Regulatory Issues if any
- Robust financial model and cash flows
- Cap table
- Use of proceeds
- Corporate structure
The above list will change based on the specifics of the business
In conclusion, the above framework may help founders to run the process efficiently and achieve a win-win for both founders and investors
