The Business End of a Funding Round — Three things you should not ignore.
Very often we think everything is alright, but the source of trouble, more often that not, is within, that we often take for granted — for the slip between the cup and lip. There are three anecdotes from my experience I am sharing here.
August, 2017:
It was a rainy August. We expected it to rain monies as well; a technology startup had secured the interest of a venture capital, and was moving towards due diligence.
The startup was doubling revenue every year in the Asian geography, but needed fund raise to expand to the US. The client had been asked by the VC to setup a data room. The founders said yes enthusiastically, but nothing happened for two weeks.
The VC fund followed diligently on the data room, but somehow, the person concerned, suddenly did not respond. Multiple follow ups — voicemails and emails later, a mail appeared in my mailbox — that their priority was to close deals and will revert on the data room later ( without any specific date). This mail was inadvertently copied to one of the VC team members.
All hell broke loose — the VC was upset, and then moved on to invest in another enterprise startup. By the time, the VC had moved to another round of their own fund raise. The feedback was — the startup had been too good, and it seemed that they actually did not need the funds.
July, 2018:
Monsoon had set in — truly in Bangalore. Chennai was dry. A Mumbai fund has issued a term sheet on an impressively growing solar manufacturing company. We were confident, in fact, so confident that the client’s legal team had started discussing the ShareHolders Agreement with the fund’s lawyers.
The due diligence was to be conducted a reputed audit firm. They wanted to do it right away; in their opinion a delay would give unfair preparatory time to the solar company, and therefore, were pushing for the dates. The fund acceded to their request, but the company was dithering.
After some warning shots, a date was agreed — and the auditor’s team visited the company’s headquarters. The CFO had been away, and the accountant wasn’t in the loop. The audit team requested for a backup of the accounting data, and the accountant stalled. In a matter of hours, the partner of the audit team pulled back his team and the investor retracted his term sheet in the subsequent 24 hours.
A post mortem of events that day, the agreed date for the audit, the CFO had to step in for some financial situation of the company, but had not kept the rendezvous with the audit team in mind. ‘ A mild slip’ in his words.
November, 2019:
This was a seed round, and it took almost a year to reach an anchor commitment for this startup. The startup again had been performing well in terms of revenue and pipeline and the pace for fund raise was measured.
The anchor investor had committed a portion of the round, but had requested to participate in a larger round — which will help the startup embark on a milestone suitable for a larger Series A round.
Technically, the round was on. A investment proposal was to then to be shared with potential co-investors; and then lo and behold, a month went by. When contacted, the founder had some other enquiries, and would ‘raise the round at his pace’. A sense of deja vu prevailed.
Christmas, 2019:
The first two startups had missed the bus. Now they are going round to raise working capital, retracting growth projections, and the graph is dipping. They are now desperate, ruing the missed chance. Time will reveal the progress of the third startup.
As the Christmas carols are sung, the songs for these startups could have been different. What they had done right — they had started at the right time, solid foundation, great growth trajectory, and they got the VC’s eye. Then what went wrong.
a) VC’s and Angels mean business.
Once a venture capitalist or angel expresses commitment or interest, they mean business. However good the business is, this part of fundraising becomes their business, and so it does too for the startup. Respecting the investors’ timelines and time is key to close out a funding transaction.
It is important to sequence the action, timelines, responsibilities, and a founder should run this stage of the transaction full time, in spite of having specific employees who can coordinate.
b) A termsheet is not a commitment.
A termsheet is not a commitment, but a written expression of interest and indication of terms. The termsheet enables the startup and the investor then get to business, mainly due diligence, that enable them to verify & confirm the facts and figures shared initially that got the investor’s interest.
To assume that the business is doing well and a termsheet is issued, means that the investment will happen is foolhardy. In fact, it is the other way round. Since there is interest, but not commitment, it is important to fully focus and cooperate during the round, and if there are advisors around, get to the details to ensure that there are no loose ends.
Then, the interest transforms to commitment. Not otherwise.
c) Respect Due Diligence. Respect Advisors.
The founders know their business well. They have the vision, passion, and the grit. That has got them this far. But it is not wise to blow the bridge, before crossing it.
But during the business end, there are advisors — investment bankers, lawyers and financial experts, who look the contracts, terms, numbers for what they are — and can give the two cents that would make sense.
The Christmas Carols are still on. The year should bring lot more focus and success to all startups.
~ Ashok Subramanian
