What are the fundraising steps, deadlines and documents?
Given its challenges, fundraising can be long (9 months to 1 year). Before committing to it, it is important to be aware of the different stages involved. Practical Guide of FundRaising.
To raise funds, you must follow a specific, methodical and rigorous procedure, which is broken down into several stages:
Convincing investors to finance your project cannot be improvised. Before contacting them, it is therefore important to prepare. The prerequisites are as follows:
• Update its website,
• Identify the experts who will accompany you (possibly a fundraiser). Business leaders who have experienced a fundraiser are often good advice. They have the advantage of being disinterested in your fundraising,
• Write and prepare the various fundraising documents:
-Executive summary: summary of the file, which serves to present the project and allows investors to assess the feasibility, credibility, and potential of the project,
– Oral presentation slideshow or “slide show” or “pitch”: you must have prepared it and tested it orally with as many “competent” people as possible,
-Business plan: detailed presentation of the project and tables of financial statements,
-Additional documents for “due diligence” (Wikipedia definition: Due diligence or reasonable diligence is all the checks that a potential buyer or investor will carry out before a transaction in order to get a clear idea of the situation of a company),
•Have a demonstration of the offer,
• Have customer references that can be contacted,
• Get an idea of the valuation of the company (with or without the help of experts),
These elements should allow you to both reassure and make you want to follow you.
2: Targeting investors and the approach phase
When you have these prerequisites, you can meet investors. For this, several steps to follow:
• Establish a list of target investors to contact: select investors according to their criteria and the stage of development of the company. This requires an investigation to know the sectors of interest, the stages of maturity of the companies in which they invest,
• Send the executive summary to the selected investors, then the business plan to those who express an interest Raise funds”),
• Participate in project presentation events in front of investors,
• Organize individual meetings with investors who wish to deepen. The first meeting is often decisive. An expert can help you get through this first eliminatory step. Getting an initial response from the investor is relatively quick; this requires between fifteen days and a month. If this is positive and after several in-depth appointments, you enter a longer phase of analysis, project study and due diligence.
3: Project analysis and due diligence
When you have reached a prior agreement on the main lines of the investment, the investor begins the “due diligence”. It begins before you have reached a final agreement and in general before the investor has signed a letter of intent, also called “Term Sheet” in English.
Due diligence consists of the investor carrying out checks to:
- Validate the estimated profitability in the event of success (in particular on the management team, the potential of the project, the study of the sector),
- Identify the risks associated with the investment.
During the study of the file, all areas are screened: legal, financial, industrial property, market, products and team. Customers and suppliers may also be solicited. Investors will “dig” into every aspect of the business, check that there is no “wolf”, that what you said during presentations or in your documents is correct…
The risks that will be assessed are:
- The dependence on key people
- Technological risks
- Risks related to industrial protection
- Environmental risks
- Commercial risks
- Legal, social and tax risks
- Financial risks: accounting audit of financial elements (balance sheet, etc.)
The duration of the due diligence depends on the type of situation encountered (generally between one and several months). Generally, it is broken down into a first “light” project study phase, during which the investor verifies a certain number of general points by himself, and a “heavier” phase for which he can appoint specialized advice to validate specific points.
This heavier phase can be reduced in the case of modest fundraising, given the costs associated with these audits.
Know that this phase also allows the investor to get to know you by working with you. For your part, also take the opportunity to validate your “affectio societatis” with him (the “affectio societatis” is the “good feeling” that we feel when we work with the other, it is the desire to collaborate with him over time).
This phase is punctuated by passages in committee, which validate the passage to the next stage.
The number of successive committees varies according to the structures, but they are generally of two types:
- A first internal selection committee,
- Then a commitment committee made up of the investor’s subscribers.
4: The letter of intent
In the event of a favorable decision to continue and enter into more detailed negotiations, the investor writes a letter of intent (or “Term Sheet”).
This document specifies the conditions of its possible intervention: valuation of the company, financial conditions, legal conditions and main clauses which will be found in the shareholders’ agreement… If you agree to counter-sign this document, a new negotiation begins to finalize valuation and draw up the pact.
The “lead investor” (or leading investor) is, in the event that you have several investors around the table, the one who will orchestrate the discussions. It is often either the most organized, or the one who invests the highest amount. , or the one who agrees to take a position first to trigger the interest of others.
5: Financial negotiations
Financial negotiations concern several aspects:
- Valuation. There are more or less complex methods for calculating this valuation. You can be accompanied, but the final valuation is above all the result of a negotiation (according to the law of supply and demand…),
- The capitalization and capital evolution table, with possible value readjustment mechanisms, as well as incentive systems for employees,
- Investor exit conditions.
6: Legal negotiations
The entry of investors into the capital is also accompanied by legal negotiations on:
- The modification of the statutes of the company,
- The drafting of the partners’/shareholders’ pact.
The pact is the document that governs the life of future partners (in the case of an SAS) or shareholders (in the case of an SA). Its objective is to provide for as many situations as possible in the life of the company, and the challenge is to find a balance between the defense of the rights of investors, the defense of the rights of historical shareholders, and the interests of the company. This negotiation stage can also be quite long.
The “closing” concerns the moment when the financing is carried out by the investor. It is done during an extraordinary general meeting which must be convened, and during which the shareholders’ agreement is signed. Beforehand, you must open a capital increase bank account. Preparing for this closing requires incompressible legal deadlines (from 15 days to 3 weeks in particular for notice, and often for the intervention of an auditor).
8: The subsequent stages
Following the fundraising, the investors become partners/shareholders of the company. As such, they participate in the general meetings of the company, and have the rights provided for by the articles of association and the agreement.
The collaboration ends when the investors leave, by partial resale (sale of the investors’ shares/shares) or total resale of the company (in the event of industrial transfer, the sale must generally be total, which obliges you to sell your units/shares).
The calendar of a fundraising operation – Indicative deadlines
-1st step: Preparation of documents and pitch: 3 months
-2nd stage: Meeting and exchange on the project: 3 to 6 months
-3rd stage: Negotiation and finalization of the operation: 3 to 5 months
The factors that can influence these delays are as follows:
- 1st stage: availability of managers,
- 2nd stage: responsiveness of investors and ability of managers to provide the necessary documents and information to investors. At this stage, investors often take time before deciding. This allows them to see how the management team is doing, whether other investors are interested, etc.
- 3rd stage: number of round trips during the negotiation.
Fundraising is a very codified process, which is organized in successive well-established phases, each of which can last longer, by you or by the investor.
Investment funds spend a lot of time managing their investments, and analyzing several projects in parallel for an investment. They are very busy and can only devote a short time to each file, which increases the time it takes to finalize a fundraiser. Negotiations can be all the longer when you have several investors around the table, with different interests and constraints to reconcile. It is therefore important to anticipate these deadlines, and to prepare the fundraising as well as possible, so as to reduce all the steps that depend on your preparation.