At every stage of the funding cycle, founders must produce financial information to support the due diligence process. It’s particularly helpful to get your house in order in the early stages of your business before approaching any potential investors to avoid delays, which could raise eyebrows.
Here’s what founders should prepare for at the key early-stage funding cycles, which can be broken down into three prime areas:
1) Pre-seed – Idea
Typically, at the pre-seed stage, startups will be self-funded, raise from friends and family, or from angel investors. Some VCs invest at pre-seed, but most come on board at the seed or later stages once operational processes are up and running, and the company has a solid customer base and robust revenue.
Going through the process of raising from friends and family funding may be more informal compared to what comes later with professional investors. However, it’s crucial that pre-seed companies have financial processes, such as the adoption of industry-recognised accounting software, in place from the beginning – even if they do know the backers well. This will put the company on a strong footing for the future.
Even at pre-seed, if someone’s looking for £200-300k, while friends and family may not ask too much, you can be certain angels will want to know what money is required for. Accuracy of financials will be key, as will projections, both of which will be part of the due diligence process with VCs down the line.
2) Seed – Product
The seed stage is where things will pick up somewhat and external interest beyond your immediate circle can be found through angel investors and VCs.
Having ensured that financials are being tracked clearly from the get-go at the pre-seed stage, the next step for a seed round will be putting clear KPIs in place. Founders should also ensure they’ve produced a robust roadmap of how funds raised will be spent, whether that’s £200,000 on recruitment, £150,000 on product development or otherwise.
Alongside KPIs, knowing metrics such as customer retention and growth trajectory will all prove to be invaluable in driving the business forward. There are exceptions to every rule but, broadly speaking, knowing what to do with your money is paramount to running your operation smoothly and securing the attention of investors – for the right reasons.
3) Series A – Product Market Fit
Investors ask for more detail the further you move along the business roadmap.
From Series A onwards, startups should have more formalised business processes and objectives in place. Founders will need to demonstrate they understand their market, their business and what the key drivers and influences are.
Series A investors will require more depth on the breakdown of investment, rather than a broad answer of staff and development. This means that spend will need to meet the expectations of investors and reassure them they’ll achieve a return on the investment and faith they’ve placed in you.
At this stage, your pitch deck should be thought of as a slightly formal elevator pitch. It will become more detailed as the company grows, however, there’s no point in your pitch being too granular at this stage.
It depends on the type of investor, of course, but the key is keeping the pitch focused and tailored. A SaaS-specific VC for example will need the right level of sector-based detail but, crucially, everything within the pitch needs to be based on the underlining accounting records and projections. The last thing you’ll want to do is go for a Series A and provide a VC an excellent set of financials, only for them to find inconsistencies in the figures when conducting their due diligence. Reconciling these ahead of time by keeping detailed and up-to-date accounting records is essential for the best possible outcome.
Above all else, producing rich management information will help businesses no matter what stage they’re at. With detailed reporting, you can plan for the future and review the data as and when you need to, rather than as an afterthought. VCs often want to see more than year-end stats – providing them visibility over trends, which can open up an understanding of growing revenues, decreased costs or whichever metrics they need to commit to your vision.