The Path to Fundraising Success: Creating a Fundraising Roadmap

Capital raising is critical for many companies. While fundraising has many challenges, a well-structured and comprehensive plan can significantly increase the likelihood of raising capital on the most favorable terms possible. One key element of the capital raising plan is creating a fundraising roadmap—a detailed guide outlining each fundraising step from setting goals to closing. This article highlights the essential components of this roadmap.

Define the Objective

The first step in creating a fundraising roadmap is defining the capital raising objective. This goal can vary from company to company and change over time as business conditions change, a company grows, and market conditions shift. Capital raising objectives can include:

financing start-up expenses;
raising capital for larger strategic initiatives, such as the development of new products, entering new markets, or making acquisitions;
funding a capital reserve so the company has the increased ability to meet unexpected adverse financial situations; and
changing the company’s capital structure to diversify its capital sources or lower its overall cost of capital.

Company capital raising objectives change over time.

When defining the capital raising objective, some key questions are:

How much capital is needed? The target capital raise amount should be reasonable to finance the capital raising objective with some margin of error for cost overruns. Companies should resist the temptation to lowball the amount of capital sought based on the thought that a lower amount of capital would be easier to raise. If the funds raised are insufficient, the objective will likely not be accomplished according to plan, which is not in the company’s or the investor’s interest.

What will the funds be used for? As a general rule, the more detailed companies are regarding what the funds sought will be used for, the greater the likelihood that capital will be raised. Funds to be raised should be based on a detailed budget and a timeline stating how funds will be used and when. Large expenditures should be backed up by a third-party quote.

For example, if funds are to be used to finance the construction of a building, this should be supported by a detailed estimate from the party that will perform the construction work. A good rule of thumb is that the greater the uncertainty regarding how funds are to be used, the higher the perceived risk in connection with an investment is likely to be. This generally reduces the probability that the investor will invest or, at a minimum, translates into a higher cost of capital, which has a negative economic impact on company founders.

A lack of precision regarding use of investment funds negatively affects capital raising probability.

What is the time frame for fundraising? Setting forth a fundraising time frame is crucial for several reasons.

Many fundraising initiatives are time-sensitive and require a funding commitment by a specific date;
Markets are volatile, and if market conditions change, the chances of fundraising success can significantly decrease;
Defining the capital raising time frame is necessary for resource planning, including budgeting how much internal time will be spent on capital raising and forecasting capital raising expenditures. This is important, given that there are often multiple conflicting demands on company resources and capital raise team member time.

What impact will the capital have on operations and competitiveness? Fundraising should also keep in sight the economic relationship between the expected benefits and costs of raising capital. If the expected financial return related to an initiative is 8%, raising capital at an effective cost of 10% will destroy firm value rather than create it.

Who is the ideal investor? As many investors have different strategies and investment time frames, the company should define the type of investor who would be the best fit for the company given the company’s overall business objective. For some companies, a passive investor who only contributes capital and is not actively involved in company oversight may be best. An active investor who offers smart capital could be the best choice for other companies. Smart capital is capital from an investor who can also contribute strategic knowledge, technical guidance, or industry contacts to a company.

Define the Targeted Deal Terms

After setting the capital raising objectives, the next step is to define the targeted deal structure. This involves:

Deciding if financing will be structured as equity, debt, or a financing model like a SAFE (Simple Agreement for Future Equity).
Establishing key economic terms, such as valuation, the equity stake offered, and interest rate in the event of a loan.
Consider what, if any, additional rights will be provided to the investor, such as a seat on the company’s Board of Directors or the preferential right to make future investments in the company.

Assemble the Capital Raising Team

Capital raising is a complex process that requires multiple skill sets, and assembling the right team is critical. Capital raising teams often include internal and external team members working together to meet the fundraising objective.

Internal team members. Key internal team members of the fundraising team often include:

Executive leadership: To oversee the fundraising process and interface with investors and third-party team members;
Operations expert: To answer technical questions about the company’s business that may arise during investor discussions and due diligence;.
Finance team: To assist with preparing financial models, answer investor financial questions, and propose alternative financial structures if necessary to facilitate a funding agreement; and
Legal team: To advise on the legal aspects of the transaction and review all legal documentation.

External Advisors. Depending on the size and complexity of the transaction, external advisors may be used. These parties and their roles include:

Investment banks or financial advisors: To prepare valuations, identify potential investors and negotiate deals.
Law firms: To draft agreements and manage legal due diligence.
Tax advisors: To advise on tax aspects of the proposed transaction and help structure the deal in the most tax-efficient way.

Prepare Capital Raising Materials

The next step in the capital raising process is to prepare capital raising materials. Key items are:

Teaser: A summary of the investment opportunity.
Investor deck: A more detailed presentation outlining the business, market opportunity, and financials.
Financial model: A detailed projection of the company’s expected future performance, valuation, and expected financial return.

Each document should be drafted to balance making a compelling investment pitch with an objective assessment of business conditions and disclosure of material investment risks.

Contact Investors

Once investment pitch materials are ready, the next step is to reach out to potential investors. This step includes:

Creating a long list of potential investors based on their investment strategies, investment approach, recent deals, and sector focus.
Narrowing this down to a shortlist of high-potential candidates who ideally not only are willing to invest but also aligned with the company’s business and value vision and could potentially collaborate with the company over the long term.
Creating a contact strategy regarding the best way to reach out to each investor candidate. This is crucial because if the right person is not contacted, the deal may not receive the consideration it deserves.

Negotiate the Term Sheet

If an investor decides to proceed with investing, the parties will typically execute a term sheet that sets forth the key proposed deal terms. This is important so the parties can ensure there is agreement on fundamental deal points before undertaking the often very significant expense of the due diligence process and preparing definitive deal documentation.

Key elements of a term sheet typically include:

Parties to the deal;
Transaction objectives;
Amount of funds to be invested and the investment structure;
Key investor rights and protections;
Key definitive investment documentation to be executed;
An investment timeline, including dates for completing due diligence, executing definitive documentation, and financial close; and
Confidentiality and dispute resolution clauses.

Participate in Due Diligence

Once the term sheet is signed, investors will typically begin due diligence. In this process, the investor examines the company’s business in great detail to identify any material risks related to the company’s business model or the investor’s investment.

Areas of due diligence can include:

Business Due Diligence: Review of the company’s business model, vision, and market potential.
Financial Due Diligence: Examination of financial statements, cash flow, projections, and cap table.
Legal Due Diligence: Review of key contracts, employment agreements, intellectual property, and corporate governance documents.
Specialist Due Diligence: For specific industries, such as technical reviews for software companies or environmental reviews for businesses with potential environmental impacts.

Negotiate Definitive Documentation

Once due diligence is complete, the parties negotiate and execute definitive investment agreements. The type of documentation depends on the financing structure:

Equity Agreements: Outline share purchase terms, investor rights, and governance roles.
Loan Agreements: Include loan terms, interest rates, default conditions, and security clauses for debt financing.
SAFE Agreements: Provide for future equity conversion under specified conditions.

Finalize Funding

Finally, the roadmap should outline funding mechanics. Depending on the deal, funds may be disbursed in a lump sum or in tranches tied to performance milestones.

Key Takeaways:

Capital raising is a challenging process and requires a structured approach.
A capital raising roadmap helps increase the chances of success by clarifying objectives, assembling the right team, and preparing thoroughly.
This roadmap can guide the key capital raising steps of deal structuring, preparing materials, investor outreach, due diligence, and finalizing agreements.

Interested in capital raising? Here are some other articles on the investor data room, the capital raising mind set, capital raising and stock option plans and shareholder value.

The photo for this article was taken by Diego Jimenez and is available on Unsplash.