Fundraising for Startups: A Comprehensive Guide

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Fundraising for Startups: A Comprehensive Guide

The Do’s & Don’ts of Fundraising for Startups

Building a successful startup isn’t easy, and lack of funding is one of the primary reasons startups fail within the first few years. In fact, a survey by CBInsights of 101 startups found 29% failed due to running out of cash. 

This article looks at what startup founders must do, and equally as important, what they must not do, to successfully raise the money needed to get their company off the ground.

Fundraising for Startups: Do’s

1. Do research potential investors before contacting them 

Different types of investors have preferences when it comes to where they invest, such as industry, company size, level of involvement, etc. While a venture capitalist is more likely to invest in a business that is already established to reduce their risk of losing investments, an angel investor is usually willing to provide seed funds for smaller, less proven operations in the early stages.

Researching potential investors before contacting them ensures there is alignment and ensures you’re not reaching out to an investor who has already invested in a direct competitor. 

The best way to do this is to find other companies that they’ve invested in and talk to the startup founders. Remember, determining investor/entrepreneur fit is a two-way street. You could have a long-term business relationship with your chosen investor, so it’s important that they fit with your way of doing business. 

2. Do have a solid business plan before going into a meeting

The success of your fundraising efforts — and therefore the success of your business — will depend heavily on how well you’re prepared for your investor meetings. Investors must believe in your vision almost as strongly as you do. They’re investing in you. It’s up to you to sell your vision, your company story, and your passion for seeing it thrive. Perfecting the pitch deck and getting potential investors emotionally hooked is the key to success, and that takes preparation. 

3. Do get your books in order

Potential investors are going to want to see your books. Unfortunately, many startup founders fail to see the importance of well-maintained, up-to-date bookkeeping and leave preparing their financials for investors to the last minute. Rushing the preparation of your financials for investors leads to mistakes and inaccuracies. 

If you struggle to find the time needed for accurate bookkeeping, it might be time to consider outsourcing your books to a professional bookkeeping firm that can manage your finances in a more reliable and efficient manner. Outsourced bookkeepers can also help prepare cash flow projections and other financial reports that potential investors might want to see. 

4. Do know the best startup funding structure for you 

Fundraising for startups comes in different formats. Understanding the pros and cons of each will ensure you choose the right type of startup funding for your company. 

If you’re comfortable giving investors a stake in your company, equity is probably the best way to raise capital as there is no repayment required. This type of startup funding is particularly attractive to companies that do not anticipate turning a profit for quite some time. However, not all startup founders want to release equity. 

If you’re unsure which is the best type of startup funding structure for your company’s goals, consider hiring a fractional controller to help you make these decisions. In addition, a fractional controller can prepare your company for an audit, generate financial statements, support budgeting, forecasting, scenario planning and more. 

5. Do know what you will be spending the funds on

Fundraising is an important step towards your final goal — spending money to build your business! In order to attract potential investors, you should be clear about how much money you need and create a budget outlining how you intend to spend the seed funds in the most efficient manner. You should section your proposed spending into specific categories such as marketing, product development and new hires that will help grow the business.

Fundraising for Startups: Don’ts

1. Don’t be slow to respond to due diligence requests

Your investors are going to have questions and will want to see specific documents. Anticipating as many of their requests as possible will not only prove you to be organized and prepared but it will also speed up the due diligence process.

2. Don’t expect the first investor you meet to give you their money 

It would be nice if the first investor you met decided to invest! However, it’s very unlikely. Fundraising for startups is time-consuming and it can take months before you find an investor. Including due diligence, it can take anywhere from 3-6 months before you receive the funds. During this time, focus on building a long-term relationship of trust with your investor.

3. Don’t inflate your numbers 

While it can be very tempting to overestimate your financial projections and growth targets to impress potential investors, you shouldn't. Investors will see through unrealistic projections and it will ultimately do more harm than good. You want to start your new relationship by being honest and transparent, presenting a realistic picture of your company's growth potential as well as the valuation of the business and the equity available. 

4. Don’t get greedy

While it’s best practice to ensure that the amount of money you’re raising has a built-in cushion, it should be just that — a cushion. Ideally, you should raise as much money as you need to reach profitability. 

5. Don’t wing it

As Benjamin Franklin famously said, “By failing to prepare, you are preparing to fail.” Without a solid roadmap of where your company is headed and a business plan showcasing how you’ll get there, investors are going to see you as an unprepared and risky investment. Every meeting with an investor is an opportunity to advance your company and should be taken seriously. The key to success is being prepared.

Finding an investor for your startup could be the difference between success and failure. Keeping informed of what to do, and what not to do, when fundraising for startups will increase your chances of finding the right investor for your company. 

How to Prepare Your Startup Finances for Fundraising Success

Here are four ways to prepare your startup finances for fundraising success.

1. Hire a bookkeeper to keep your books up to date

Clean, correct, up-to-date books are fundamental to the fundraising process. Not only is proper day to day bookkeeping essential for creating an accurate historical picture of your company’s financial performance, it’s the only way to:

  • Gain visibility into your runway (cash balance ÷ burn rate)
  • Understand how much money you need to raise
  • Set realistic financial projections and milestones

Considering how time-consuming raising funding can be, you should consider hiring a bookkeeper to manage your financial records if you haven’t already.

An experienced bookkeeper is a true fundraising asset - especially when it comes to preparing financial reports for potential investors (like income statements, balance sheets, and cash flow statements) and answering account-based questions about business developments.

With cash management particularly important for early-stage companies, it’s worth engaging a bookkeeper to become familiar with your finances before fundraising matters turn urgent.

2. Set up a reliable accounting system that can scale with your business

Prior to kickstarting any fundraising activity, you’d be wise to pair your small business SaaS bookkeeping practices with a reliable accounting system that can:

  • Accurately track revenues, expenses, and other financial data
  • Make it easier to generate business insights and ensure compliance with government regulations
  • Accommodate high growth potential, so you won’t have to switch systems mid-stride

Here are 3 tips for setting up an efficient, scalable startup finance accounting system.

Stop using spreadsheets. Not only are spreadsheets prone to human error, as transaction volumes increase, managing them can quickly get out of hand. Plus, many investors will question the accuracy of financial data that’s been generated using spreadsheets. 

Take advantage of accounting software. Software like QuickBooks Online or Xero makes it easy to track data and generate financial reports. It also reduces input errors, saves time over manual data entry, and integrates with other accounting tools that can scale with various business models.

Automate as much as you can. Consider implementing time-saving software and apps like:

  • Chargebee or SaaSOptics to manage subscriptions, deferred revenue, billing, and invoicing
  • Dext Prepare or Expensify to track, manage, and store expense documents
  • Plooto or Rotessa to handle payments and manage cash flow
  • Payworks or ADP to calculate payroll deductions, process payroll, and track employee time

Adopting a reliable accounting workflow and good financial hygiene won’t just promote investor confidence in you, your team, and your numbers, it will show you know what you’re doing from a financial, managerial, and operational perspective.

3. Understand which startup finance metrics investors are looking for

Different types of investors prioritize different metrics for understanding business value and health. Most, however, will want to evaluate your top-line growth which, for SaaS companies, usually means examining your:

  • Revenue (including MRR and ARR) and Gross Margin
  • Year-over-year Revenue Growth and Revenue Churn
  • Customer Lifetime Value, Customer Acquisition Cost, and Customer Churn Rate

Since investors are likely to benchmark your KPIs against industry competitors, it’s important to understand your metrics and know where you stand in terms of other companies’ startup finances.

While KPIs are important, however, make sure you focus on the ones that are most relevant to your products or services. Clear, quality data is far more valuable than the volume of information when it comes to the metrics you use.

4. Build your financial projection

Your fundraising timelines and targets will largely depend on your company’s cash position and projected cash flow needs. 

By building a financial projection based on realistic, historical drivers or trends you can illustrate your growth and profitability, figure out if and when you need capital, and determine how much you should raise.

A solid financial projection also allows you to:

  • Plan more effectively around hiring needs
  • Understand your profitability better over the long term
  • Provide investors with a medium-term financial forecast

Assembling a business plan based on reasonable growth assumptions makes it easier for prospective investors to decide whether the funding you’ve requested is realistic in terms of meeting your goals.

If you don’t know how to create a financial projection, hiring a controller or part-time controller may be the right move. 

A fractional controller, for example, can support your fundraising efforts by:

  • Assisting with budgeting, financial projections, and stakeholder reporting
  • Tracking key performance metrics and analyzing financials to evaluate profitability 
  • Ensuring your financials are ready to be viewed by investors (including when a merger or acquisition is in the works)

Fundraising Due Diligence Checklist for Startups

If so, you should be prepared to give equity investors like venture capitalists and angel investors the information they need to carry out their due diligence process, satisfy their criteria that your business is well-run, and explore any potential investment risks.

By gathering the appropriate documentation in advance, you can:

  • Respond to due diligence requests in a timelier manner
  • Show prospective investors you’re organized, with properly managed finances 
  • Speed up the fundraising process

In addition to a well-constructed pitch deck, here are 7 key fundraising documents that should be on the due diligence checklist of every startup.

1. Company Valuation Statement

Whether or not your products or services are turning a profit, you’ll need to show potential investors what your company is worth. 

There are several methods for determining the financial value of SaaS businesses and other startups, including:

SDE (Seller Discretionary Earnings) = Revenue - Cost of Goods Sold - Operating Expenses + Owner Compensation

  • By calculating what’s left after costs and expenses are covered, SDE lets early-stage companies with less than $5 million in annual revenue demonstrate their value.

EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) = Net Income + Interest + Taxes + Depreciation + Amortization

  • More accurate than SDE, EBITDA is the valuation of choice for mature companies with more than $5 million in annual revenue. You can even compare your business to the industry average by calculating your EBITDA margin (EBITDA ÷ Total Revenue).

ARR (Annual Recurring Revenue) & MRR (Monthly Recurring Revenue)

  • As a measure of future growth based on current revenue, ARR and MRR are useful for valuing pre-seed and seed-stage startups that have a minimum $2 million in ARR, a forecasted year-over-year growth rate of 50%, and a reduced reliance on founder involvement.

2. Financial Statements

As an integral part of any due diligence checklist, startups must have an up-to-date balance sheetincome statement, and cash flow statement to share with investors.

To ensure these financial statements offer an accurate picture of your accounts that will inspire investor confidence, you should use cloud accounting software like QuickBooks or Xero—rather than spreadsheets—to keep your books and prepare your reports.

If you lack the time or knowledge to properly track your finances, outsourcing to a cost-effective service provider like Enkel is a great way to optimize your day-to-day bookkeeping

Not only can Enkel’s accounting professionals generate the reports you need to support your fundraising, you can take advantage of fractional controller services to ensure all your finances and projections (see more below) are investor-ready.

3. Financial Projections

Much like a bank does when examining your business plan, investors will be looking to determine the future profitability of your company by examining your financial projections.

These projections should:

  • Indicate future revenues, expenses, and growth patterns
  • Be based on a combination of your historical data and realistic predictions around market influences
  • Include both short-term (monthly estimates covering a single year) and long-term (3 to 5-year) forecasts 

You can use your financial statements to create sales, expenses, and cash flow projections.

4. Cap Table

A capitalization (or cap) table is a spreadsheet showing all your startup’s investment transactions. 

While you’ll typically begin by recording the percentage of ownership individual investors have in your company—including the value and dilution of securities over time—the more rounds of funding you initiate, the more complex your cap table is likely to become. 

Eventually, it may include:

  • IPO (initial public offering) or M&A (merger and acquisition) transactions
  • Lists of venture capital funds and other potential investment sources
  • Legal documents outlining events like stock issuances, transfers, and cancellations, stock options, and debt-to-equity conversions

To ensure the investment activity you share with new and existing funders is accurate, you’ll need to carefully manage all your documentation from the time your startup is founded.

5. Organizational Chart

An organizational chart is similar to a family tree, but instead of relatives, it shows the roles and relationships of people inside your company.

As a simple, visual diagram that identifies team members, their duties, and how they interconnect, an org chart gives investors quick insight into:

  • How your startup is structured in terms of a president, vice president, executive officers, directors, and management teams
  • Who individuals report to or collaborate with
  • What benefits each team member brings to your company

For fundraising goals that include hiring new staff, organizational flowcharts are an effective way to see which areas of your business may be over or under-resourced. 

6. Intellectual Property Documents

If you lay claim to intellectual property (IP), investors will want to assess the value of your IP portfolio as part of their due diligence checklist. Startup founders should also be prepared to show lawful ownership of all IP assets—both to secure funding and to avoid legal issues in future.

That said, you may need to assure prospective investors that:

  • Your company isn’t infringing on the intellectual property rights of others
  • No other party is infringing on your rights
  • You aren’t currently (or expecting to be) involved in any legal action involving IP rights

If, rather than owning intellectual property outright, your company is part of a leasing or licensing agreement, you’ll need to disclose that to investors as well.

7. Material Agreements

If your startup is committed, contracted, or partnered to another company—or has any other agreements that impact revenue—you’ll need to make supporting documentation available in your fundraising portfolio.

Common examples of material agreements investors will want to see include:

  • Property or equipment lease or purchase agreements
  • Business insurance policies, loan documents, and term sheets
  • Confidentiality, consultant, or contractor agreements
  • Employment agreements (including those addressing employee benefits)
  • Your company’s terms of service

As you work to cross the 7 items in this guide off your due diligence checklist, your startup may wish to store gathered documentation in a secure data room so it’s ready when investors request it. 

Remember that you’ll also need to get and keep your financials up to date throughout the fundraising process. 

To ensure your numbers hold up under scrutiny—and that you’re prepared to answer investor questions knowledgeably—you’ll need accurate books and a solid understanding of your company’s financials.

If you're having trouble getting your financials ready for fundraising, we can help! Get in touch with us today to get the bookkeeping and accounting support you need.

At Enkel, we’re experienced in helping startups prepare for fundraising by keeping accurate, investor-ready books. Contact us today to learn how we can help manage your books so that you’ll always be ready to raise your next round!

Omar Visram
About Omar Visram
Omar Visram is the Co-founder and CEO of Enkel Backoffice Solutions Inc. Headquartered in Vancouver, Enkel provides bookkeeping, payroll, accounts payable and accounts receivable services to over 300 organizations Canada-wide.