Funding is a concern a lot of businesses have, seeking to increase their output, project their brands, scale their productions, or enter new markets.
The first step to raising funds is due diligence; it is basically the first thing you’re going to run into when you are talking to a prospective investor. Due diligence is essentially a way that the investor puts you and your team under a microscope to try to understand you, and your team, and investigate if there are any legal, financial, or regulatory issues to be aware of; or any issues that could cause them to reconsider the investment. One thing you must be aware of and come to terms with is that due diligence is an extremely tedious, often frustrating, and very time-consuming process. But you must understand that even though they’re asking you some questions that you might think are personal in nature, it’s not personal. They’re trying to uncover enough information to enable them to conclude whether they want to invest in your company or not, and what adequate systems to support what you’re doing.
A second major step you must cover is valuation. There are different methods employed in valuing a company with certain standard metrics covered such as revenue, exit value, pre and post-money valuation etc. It is amazing the number of CEOs who come to me seeking funding yet do not have these first two steps covered.
The third you must cover is your term sheet. The term sheet is a non-binding agreement that basically contains the terms of the deal. It defines things such as the type of investment, equity, debt, convertible note? In terms of equity, are they looking at common stock issuance or preferred stock issuance? In term of debt, are they looking at a loan, or a convertible note? These are a few things to have sorted out before beginning the journey of seeking funding.