Checklist: How to Prepare for a VC Fund Raise

I recently wrote a post with some tips on avoiding a busted VC deal.  One of my tips was to be ready for diligence before you sign the LOI.  Here’s some more thoughts on getting ready.

The key to a successful and pain-free venture capital raise is to be informed, prepared, and engaged. To be informed, you need to regularly speak with bankers, VCs and lawyers that cover your space.

Start fund raising 12-18 months before you need the money. You will need that time to sift through and qualify various VCs. Also, spend a year qualifying VCs by building relationships and getting to know them well enough to qualify the ones you like from the ones you don’t.  Picking a VC is not about the money (yes, all VC money is green).  It should be all about picking the right firm with the culture and expertise that fit your company’s culture and aspirations.

During that courtship period, don’t shut out VCs. Take their calls and give them an overview of the business. You are probably getting calls from VC analysts already (if not, then you’re not promoting yourself enough). When you do, take the call and ask for a call with a partner.  Keep that dialogue open on a quarterly basis.  You can’t be too busy for that, as all it takes is setting a pace and scheduling a call or two a week (maximum).

Next, hire a VP of Finance (if you don’t already have one). I’m a huge fan of hiring a senior finance executive sooner than later. A solid operating CFO is a blessing to an early stage CEO. (For more details, check out this post titled “The DNA of the CFO.”)

Six months before you’re ready to begin a fund raise process, start putting together the investment package. This should include:

1. Company presentation:  You don’t have to write a business plan, although it can be helpful.  Build a PowerPoint presentation and make sure it’s no more than 20 slides long. Avoid high-level fluff. Let each page be insightful and meaningful. Don’t worry about making each slide pretty. The more detail the better.  Don’t make your product the focus on the presentation!  Tell a story. Start with the company and its aspirations — the WHY (check out this talk (and book) by Simon Sinek). Then talk about the customer pain that you solve and how. Then discuss the market and competition (don’t you dare say you don’t have competitors. If you do, you’re either foolish or lying).  Then go into the product and how it differentiates. Then talk about the team. Then your plans and where you need help.
2. Company financials:  You don’t need an audit by an accounting firm to raise a round. But you do need to have a full set of financials (they don’t need to be GAAP compliant). At a minimum, have full set of financials per year since inception that include the P&L, Balance Sheet and Cash Flow. In the P&L, make sure to breakout bookings from revenue. And for each, breakout the types (e.g. SaaS bookings vs. perpetual bookings vs. services).  Make sure to show your gross margin. Breakout expenses by function (R&D, Sales, Marketing, Services and Admin).
3. Company economics: this is where you highlight key metrics that are critical to running the business. Pre-funding, startups tend focus on cash flow. Post-funding, you will be tracking the economics of the business. Think about the three or four key metrics that are critical to scaling your business. For SaaS companies, we look for metrics like new customer booking growth, the economics of new customer acquisition, and existing customer growth and churn.  For more on this, check out a couple of posts I wrote in the past: “Build a Profitable SaaS Business” and “The CEO Imperative – Build your Operational Control Panel“.
4. Prepare for legal diligence: at this point, you should retain a lawyer that specializes in VC deals. Don’t shy away from high-tier law firms. Ask around to other companies that have raised capital about what lawyer they used.  Having a good lawyer is much more important than having an investment banker (in fact, I don’t recommend using a banker to raise money, but you should have one for consultation.)  Have your lawyer prepare you by pulling together what is typically required in deal legal diligence. This would include your current option plan, employee confidentiality agreements, IP documents, incorporation docs, board resolutions, customer agreements and contracts, software licensing agreements, etc.  Have all the material ready and saved in an online deal room.

Here’s OpenView’s pre-term sheet due diligence template. It should give you a good start on items 2 and 3 above.

Company Financials

1. Company’s definition of Booking

2. Company’s definition of Revenue

3. Monthly, for two (2) fiscal years back and one projected forward: Profit and Loss statements.  Including quarterly revenue in bookings and recognized revenue (e.g. US GAAP). Costs on P&L to be broken out by key operation functions (e.g. Marketing, R&D, etc.) . If you are not accounting using GAAP standards, please specify and provide accounting assumptions.  Please provide in Excel format.

4. Monthly, for two (2) fiscal years back and one projected forward:  Cash Flow Statement  . Please provide in Excel format.

5. Most Recent Balance Sheet. Please provide in Excel format.

Company Sales Performance

1. Monthly, for two (2) fiscal years back and one projected forward: Recognized revenue broken out by type: e. g. License, Subscription, Maintenance, Service, Other . Please provide in Excel format.

2. Monthly, for two (2) fiscal years back and one projected forward:  GAAP Revenue broken out by Product . If you are not accounting using GAAP standards, please specify and provide accounting assumptions.  Please provide in Excel format.

3. Monthly, for two (2) fiscal years back: Bookings by customer, broken out by product, by type of revenue (license, subscription, maintenance, service, Other) – customer names are not important at this stage, if sensitive . Please provide in Excel format.

EXAMPLE (Please provide in Excel)

4. Total cost to acquire a single customer: trend by month with associated sales and marketing expense broken out . Please provide in Excel format.

5. Average one year value of a single customer (Average Annual Booking) and estimated total lifetime value (=Average Gross Profit x Estimated Number of Times Customer Renews/Reorders) . Please provide in Excel format.

6. Monthly or quarterly, for two (2) fiscal years back:  Bookings by sales person/unit, broken out by revenue type, against quota. Please provide in Excel format.

7. Monthly or quarterly, for two (2) fiscal years back:  Channel Sales, booked revenue by channel partner, by customer – broken out by revenue type, against plan . Please provide in Excel format.

8. Number of deals completed and average deal size by month for past 12 months . Please provide in Excel format.

9. For next two quarters or next fiscal year: qualified sales pipeline . Please provide in Excel format.

10. Breakout of each individual customer revenue by month . Please provide in Excel format.

11.  Billing options (e.g. upfront , monthly, quarterly, annually, transaction based, etc…)

Corporate Structure

1. Full-diluted Capitalization Table, with details/terms of previous financing rounds . Please provide in Excel format.

2. Key management current compensation and projected compensation changes post-investment . Please provide in Excel format.

3. Current Board

4. Corporate entity and legal structure

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