HOW TO

RAISE

FUNDING

How to Prepare

for a Fundraise

(Pre-Revenue)

eGuide

www.tencapital.group

info@tencapital.group

Contents PART I: Startups .............................................................................................. 4

Your Game Plan ......................................................................................................................................... 5

Funding for Your Startup ....................................................................................................................... 7

Should You Raise Funding? .................................................................................................................. 8

Best Source of Funding for Your Business ...................................................................................................................... 8

How Much You Should Raise ............................................................................................................................................... 9

PART II: Preparing Your Raise .................................................................. 10

Common Misconceptions about Fundraising .............................................................................. 11

You Must Know the Investor ............................................................................................................................................. 11

Yes Means You’ve Got a Deal ............................................................................................................................................ 12

Before You Raise ..................................................................................................................................... 13

Building Relationships .......................................................................................................................................................... 13

Preparing Your Raise ............................................................................................................................................................. 14

Key Documents ....................................................................................................................................... 15

Pitchdeck ................................................................................................................................................................................... 15

Proforma .................................................................................................................................................................................... 15

Data room ................................................................................................................................................................................. 16

Individuals Who Can Help With Your Fundraise ......................................................................... 17

Metrics and Milestones ........................................................................................................................ 18

Metrics ........................................................................................................................................................................................ 18

Milestones ................................................................................................................................................................................. 19

Deal Structure .......................................................................................................................................... 20

The Importance of Product and Market Validation ................................................................... 22

Are You Venture Fundable? ................................................................................................................ 24

PART III: Positioning the Deal ................................................................... 25

Impact Investing ...................................................................................................................................... 26

Multiple Position Points ....................................................................................................................... 27

Your Position Points .............................................................................................................................................................. 27

PART IV: Legal Issues ................................................................................. 29

Investor Accreditation ........................................................................................................................... 30

Intellectual Property .............................................................................................................................. 32

Employment Law .................................................................................................................................... 34

Legal Entity ................................................................................................................................................ 36

LLC ................................................................................................................................................................................................ 36

Delaware Corp ......................................................................................................................................................................... 36

About TEN Capital ...................................................................................... 37

PART I: Startups

5

Your Game Plan

In considering a fundraise, think about your ultimate goal with the business.

Below are some important things to think about:

1. Are you building a business that will be your lifestyle business for the

next 20 years?

2. Are you building a business that you plan to sell for a sizable gain in

the future?

3. What’s the exit plan for your business?

4. Where do you see the business ending up in the future?

5. What’s the timeline for the business?

6. If you know the exit plan of your business and how long it will take,

then funding the business becomes much easier to sort out.

7. If you plan to keep the business as a cash flow machine for yourself,

then revenue-based funding may be the way to fund it.

8. If you plan to sell the business for a nice return, then equity funding

will be a good option.

6

9. If you don’t need much funding, then you could cash flow it from

revenue.

10. If you don’t plan to sell the business and need a small amount of

funding, you could take out a loan and after you pay it off you have

the business free and clear for whatever you want to do.

The key is to understand the overall game plan for the business and then

decide how to fund it.

7

Funding for Your Startup

One of the biggest questions many new entrepreneurs face is:

How do you know if you need funding for your startup?

The following are things to consider when trying to decide if you need

funding or not.

First, consider the type of business you are going to build and what it will

take to get it up and running.

1. Are you setting up a services business?

2. Will it be a tech-enabled business?

3. Will it be a physical product business?

The type of business will determine your cash flow needs.

Service businesses can be bootstrapped by using customer money to fund

it.

Tech-enabled businesses typically need to raise funding due to the cost of

building out the technology that drives it.

Physical product businesses need to raise funding along the way due to

the cost of building product and inventory.

The second thing you should ask yourself is:

How fast do you plan to grow?

The faster the growth rate, the more funding you’ll need to grow it.

The slower the growth rate, the less funding you’ll need.

Consider these two questions to figure out how much funding you’ll need

for your startup.

8

Should You Raise Funding?

Funding accelerates what you already have going in your business.

Before thinking about funding, you should have a core process for

acquiring customers and providing a service. If you don't have this, then

funding at the early stage will only hurt your business.

It's best to continue testing your core business model until you know it

works. It's important to find the best channel for acquiring customers and

at the most efficient cost. By stating your core business in numbers, you

now know what it costs to grow your business.

Best Source of Funding for Your Business

In addition to equity funding, you may consider:

debt financing

self-funding

bootstrapping

Debt financing requires you to pay back the loan but after you do so, you

own the business outright.

You can self-finance which means you put in your own money into starting

the business.

You may also consider bootstrapping, which is another way of saying, find

a customer who will pay for your product/service. For this you may need to

offer additional services at a higher price to cover the startup costs, but this

is a great way to grow your business as it keeps you focused on your

product and customer.

9

How Much You Should Raise

When it comes to figuring out how much you should raise, the simple

answer is:

Raise enough so that it will take your business to the next level.

Think about the position you need to achieve in order to raise the next

round of funding. Your fundraise should take you there and set you up for

the next raise. Keep in mind that your valuation in any startup is low at the

beginning. Raising too much money at a low valuation will end up giving

away too much equity. For those with larger fund raises you may want to

break it down into several milestone steps in which case you can raise your

valuation for each step as you achieve more revenue.

10

PART II:

Preparing Your

Raise

11

Common Misconceptions about

Fundraising

In the world of fundraising, it can be difficult to navigate the limitless

information that is out there in regards to raising money for your startup.

Since there is some much information surrounding the topic,

misconceptions often get presented as facts. Below, are a few of the most

common misconceptions new startups face when entering the world of

fundraising.

You Must Know the Investor

One major misconception about fundraising is that you must know an

investor before you can approach them for funding.

This simply isn’t true. However, there are a few steps you can take before

approaching an investor that may increase your chances of success.

1. Seek validation from your own group before approaching those

outside of your core. The goal here is to start with your current

network and expand outward.

2. Identify the right type of investor for your deal based on risk and

return.

Angels usually want 3-5x their investment.

Venture Capital aim for 10x their investment.

Family Offices seek 5x their investment. One thing to note about Family

Offices is that they are typically more patient when it comes to their returns.

12

Choose the right investor for your raise and then seek those investors out.

Initiate a conversation with them and follow up with the goal of building a

relationship.

Yes Means You’ve Got a Deal

Another misconception is that once an investor has said yes then it’s a done

deal.

In most cases this just isn’t the truth.

Do not take yes as the answer to your fundraising prayers and expect to see

money quickly follow.

The yes in this case marks the start of the diligence phase. This phase

typically lasts 4 to 8 weeks.

13

Before You Raise

Building Relationships

Raising funding requires:

document

business preparation

pitching

extensive followup

However, there’s one thing you need to do before you can raise the

funding:

You need to build a relationship with the investor.

If you are raising funding through a crowdfunding portal you can call that

interaction a relationship, but only if you’re raising $500.

If you’re raising $50000, then you’ll need to build a deeper relationship with

the investor.

As you go through the process of gaining introductions, contacting

investors, setting up meetings and pitching, remember the fundamental

goal is to come away with a stronger relationship with the investor.

Think about it this way:

Each interaction means the investor gets to know more about you. You

also get to know more about the investor.

Keep in mind that even if the pitch doesn’t go as planned and the meeting

didn’t stay on track, that’s okay. The most important thing is that you still

grew the relationship.

14

Preparing Your Raise

1. For your business, check with your team, board, and investors to gain

alignment. Your fundraise launch should not come as a surprise to

these people.

2. Complete your investor documents including:

a. pitch deck

b. financial proforma

c. diligence room

3. Your financial proforma should lay out how much you should raise

and what you will accomplish with it.

If you’re not sure how to set this up, then write down your current revenue

and the revenue you will have in 24-36 months. From this, you can extract

how much funding you will need to raise and how many people you’ll need

to hire.

4. Your pitch deck should tell the story of how your business makes

money and why it will succeed.

5. Build your investor network.

Make a list of investors to contact including existing investors.

Setup a few initial meetings and tell the prospective investor you plan to

launch a fundraise in 3 months. This removes the pressure from the investor

and often elicits feedback on how much to raise, how to structure the deal,

and more.

15

Key Documents

Before your raise, there are some key documents that need to be in place

before you can approach investors. The 3 most important documents are:

1. Pitchdeck

2. Proforma

3. Data room

Pitchdeck

A pitchdeck is usually 10-15 slides introducing your deal to the prospective

investor. It should cover the basics of the business including:

1. The problem you are solving

2. The solution and product you are offering

3. The competitive advantage

4. Your business model

5. The team

6. Financial projections

7. Your fundraise amount

8. The exit you envision

Proforma

You’ll need detailed 3-5 year financial projections often called the

proforma. This gives the investor an idea of what you will do with the funds

and how you envision the company growing.

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Data room

A data room is also known as a due diligence box. This data room contains

key documents about your business. These documents include:

1. Entity filings

2. Patent filings

3. Articles of incorporation

4. Income statements

5. Balance sheet

6. Other documents detailing your business

Investors who want to make an investment will look for these documents so

they can run their due diligence on you and your business. Be prepared and

have these documents ready before your raise.

17

Individuals Who Can Help With

Your Fundraise

When it comes to funding your startup, it’s important to know who you can

turn to for help. As a general rule, you start with your core network and

expand the circle outward.

The list of individuals in your core network should include the following:

1. Family

2. Friends

3. Coworkers

Next, you can look to your service providers for funding. This list may

include:

1. Attorneys

2. Accountants

Another potentially great resource for funding is past coworkers, so they

should be considered when you're in the process of seeking funding for

your business.

As you progress through this list, ask for referrals to second connections.

After you’ve gone through your network, you can expand the circle further

with:

1. Local angel networks

2. Local VCs

3. Local family offices

4. National angel networks

5. National VCs

18

Metrics and Milestones

Metrics

Entrepreneurs often find themselves bewitched by the idea behind their

business. A lot of times, these entrepreneurs believe that investors will write

them a check based on their idea alone.

While it’s true that many entrepreneurs have great ideas, the thing to

remember is:

No matter how great your idea is, standard startup metrics apply.

New technologies can capture the imagination. A prime example of these

new technologies taking the world by storm is blockchain in 2017.

Blockchain sent startups through a hyper funding phase. However, this only

lasted for a short time.

So, it bears repeating, in today’s world, standard startup metrics apply.

Standard startup metrics means:

1. You have a platform setup with users on it and line of sight to

revenue.

2. You have market validation and product validation – the user likes the

product and will pay for it at some point.

3. You, too, may be excited about your idea, product, team, or more but

don’t forget the metrics.

19

Milestones

In fundraising, milestones are specific goals you need to accomplish that

demonstrate the success of your business.

When crafting your fundraise story focus on key milestones including

those you just hit and those you are striving for.

It’s important to focus on these milestones because they demonstrate you

are making progress.

Here are the 4 types of milestones to consider:

1. Team

Make sure you are hiring key people that can help you grow the business.

2. Product

This means bringing the product to a new level of completeness.

3. Sales

Strive for achieving sales traction such as reaching $50K MRR.

4. Fundraise

Aim for landing a big investor with a specific commitment or investment.

While you may not always hit the milestones you planned, you will most

likely find success along the way which demonstrates accomplishment to

showcase to potential investors.

20

Deal Structure

Deal structure is an important part of the fundraise for any business. There

are two primary deal structures for your startup when you are seeking

funding:

1. Convertible Note

The convertible note is a debt instrument that converts to equity later.

While convertible notes are a great option, if you want to use a straight

debt instrument you should consider using a promissory note.

2. Equity

The next option to look at when it comes to deal structure is equity. The

basic function of equity is this:

It gives ownership rights in the company.

When using an equity deal structure, the ownership is set by the valuation

put on the company. An equity deal often comes with additional terms such

as:

Board seats

Voting rights

Deal Structures in Action

When just starting out, most startups use a convertible note to launch their

fundraise. The reason for this is because it doesn’t set the valuation of the

company which drives how much the investor gets for their investment.

As you move through the process, you will find setting valuation is a major

step in the fundraise.

21

Until there is a lead investor and the valuation is set, there will be many

investors who want to be in the deal, but don’t want to spend time setting

the valuation.

Later in the fundraise, an investor will express interest in joining. However,

that investor is likely going to want equity.

If the investor is looking at investing $100K or more, then they are a lead

investor candidate.

After the equity investment is made, the convertible notes convert into

equity.

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The Importance of Product and

Market Validation

One of the biggest areas of concern with new startups is Product and

Market Validation.

It’s important for investors to know that the product works and someone

will buy it.

Investors look for evidence of this before moving into further diligence, so

be sure to demonstrate that your product is worth buying in your pitch.

Beta users are a great way to show the product functions and is of

customer interest.

For startups, the chance that you will get the product up and running is

fairly high. However the biggest questions are:

Will someone use it?

Will someone pay for it?

Customers who pre-pay for a product or service check the market

validation box. The reason they check this box is because it demonstrates

that you are solving a real problem.

If you don’t have anyone paying for the product or service, then you’ll need

to resort to pipeline metrics showing:

The number of downloads

Trials

Pilot programs

23

While this is not the same as a paying customer it gives a leading indicator

that the customer will most likely buy.

It’s helpful to show the funnel prospects go through in engaging your

product. This includes:

Lead generation

Qualification

Closing

Trials

Pilot tests

Signed customers

Keep in mind that Investors look for a consistent signup percentage on the

leads going through your program.

While the absolute number of signups may not be high, the repeatability of

your model can be compelling to the investor.

24

Are You Venture Fundable?

If you want to raise venture capital funding then there are a few areas of

your business that you will need to focus on. Check these points to see if

your startup qualifies for venture funding.

1. Recurring revenue

Do you or do you plan to have recurring revenue in your model?

2. Platform based approach

Are you taking a platform based approach to the product/service delivery

or do you sell one off products?

3. Data-centric

Are you capturing key data elements that improve your process and

product?

4. Strong Team

How strong is your team? Does each member bring expertise about their

field to your business?

5. Fast Growth (>50% YoY)

Are you growing at least 50% YoY?

6. Large Target Market

Are you targeting a market over $1B?

The more checkmarks you have on this list the more fundable you are with

VCs. If you’re lacking in some of these areas, consider how you can pivot in

order to make your startup more VC fundable.

25

PART III:

Positioning the

Deal

26

Impact Investing

The majority of angel investors want to make money and make an impact

while making returns on their investments.

For the most part, impact refers to how investors make a contribution to

the community with their investment.

Some angels do this through Impact Investing.

Impact investing means the startup provides a community service that goes

beyond generating revenue and providing jobs.

Impact investing is one way investors narrow the field of startups they may

offer funding to.

Each investor has their own set of issues they care about, so if you are an

impact startup you should understand:

The definition of impact is in the eye of the beholder.

Typically, if an investor wants to invest in an impact startup they look at the

company’s impact metrics and not just their financial metrics.

Financial metrics include cost of customer acquisition and lifetime value of

customers.

Impact metrics focus on the community benefit such as how many

students graduated or reduction in carbon footprint.

A good impact startup will have some evidence of the benefits they are

generating for the community, so keep this in mind when seeking

investors.

27

Multiple Position Points

Having a fine tuned pitch for your startup is a major key to the future

success of your business. A great pitch can lead to funding, afterall. In

pitching, you can position your startup in more than one way depending on

the interests of the investors.

Your Position Points

1. You can pitch for the sector your startup is in. For example, Edtech or

Fintech.

2. Many investors focus on a specific sector. If this is the case, you talk

about the metrics that investors look for in certain companies.

3. You can pitch your startup as an impact deal. Many investors have

impact investing as a part of their investment thesis and may engage

with your deal on that level alone. Talk about your impact metrics,

such as how many students graduated, or how many students' scores

improved.

4. You can position your deal based on monetization such as recurring

revenue.

5. There are many investors looking for SAAS businesses regardless of

the sector. For these situations, talk about your ARR or MRR numbers

and growth rate.

28

In most cases, your pitch deck is going to be the same, but what you

emphasize should change to fit the audience you are pitching to.

29

PART IV: Legal

Issues

30

Investor Accreditation

An accredited investor is a person who is permitted to make investments

that may not be registered with financial authorities.

It’s important to understand that in raising equity funding you can only

raise from investors who are accredited.

The Securities and Exchange Commission (SEC) establishes the criteria for

those who are accredited and those who are not.

If you are interested in the specific requirements you can find these on the

SEC website which is located here.

The rules were set in 1968 by the Securities and Exchange Commission and

have changed only once since then.

In short, an Accredited Investor is:

Anyone who has a networth of $1M dollars excluding the house they live in.

Note that there is also exemption that allows up to 35 non-accredited

investors to invest in your startup and this allows for both family and

friends funding.

There’s no formal process for achieving accreditation as most angel groups

and startups raising funding require you to self-declare accreditation.

There are two ways non-accredited investors can invest in startups:

1. Title III crowdfunding platforms

2. Reg A+ offerings

These require specific requirements such as:

licensing for the crowdfunding platform

31

registration for Reg A+ fundraise

The licensing and registration both provide compliance work to allow for

anyone to invest in a startup.

32

Intellectual Property

Intellectual Property is a work such as a product or a design, to which an

individual has the right to apply for a patent, trademark, copyright, and so

on.

It’s important to consider your intellectual property strategy when

launching your startup.

Intellectual property, also known as IP, generally includes:

patents

trademarks

copyrights

trade secrets

Here are a few things to keep in mind when it comes to Intellectual

Property:

1. You should trademark your company name.

2. For your technology, you can either file patents, or keep it as a trade

secret.

If you file patents, you will first file a provisional patent. This gives you 1

year to decide if you want to file a full patent or not.

Half the value of a patent is in raising funding. Investors will give you credit

for technology that is substantial enough to protect.

It’s common to file multiple provisional patents. During the following

twelve months after filing, you’ll have time to consider which patents are

going to provide protection against competitors.

Before the patents expire, you will need to file for a full patent on the ones

you want to keep.

33

The alternative to patents is keeping trade secrets. In this case, there is no

filing required.

If you have trade secrets, you’ll need to make clear to prospective investors

what value those trade secrets bring to your business and why they are

important.

For those who want to know the trade secrets, they must sign an NDA to

learn more. Do not discuss trade secrets without an NDA.

When discussing the business with prospective investors who have not

signed an NDA, talk about the benefits of your trade secrets rather than

how they work.

For example:

Our trade secrets reduce the cost of product build by 3x.

By doing this, you receive credit without having to reveal any secrets.

34

Employment Law

Employment law governs the employer/employee relationship within a

business.

When launching your startup, it’s important to have an understanding of

employment law and how it works.

Here are some things to keep in mind:

1. You should check to see what contracts your prospective employee

may have signed with a former employer around non-competes, non-

solicitation agreements, and assignment of inventions.

A non-compete means the employee cannot work for another company

that competes with their former employer.

If they signed a non-compete with a previous employer who is a

competitor, then this may be an issue when attempting to hire the

employee.

A non-solicitation agreement prevents an employee from approaching

your employees to hire them away.

Assignment of inventions means the prospective employee must sign

over their right to inventions during their work at your company.

2. All employees should sign a non-disclosure agreement regarding

their work at the company.

3. All employees should have a contract that defines they are working at

will. This means either the employer or the employee can terminate

the relationship at any time.

4. Correct classification of employees is a key point when it comes to

employment law. Taxing authorities will see if you have misclassified

35

an employee as a contractor to avoid paying payroll taxes, and

meeting minimum wage requirements.

5. There are wage payment laws which require payment for hourly

workers at a certain frequency such as biweekly.

36

Legal Entity

A legal entity is a company or organization that has legal rights and

responsibilities.

Your startup must have a legal entity to raise funding.

LLC

Start with an LLC or Limited Liability Company.

You can file for an LLC with your Secretary of State at your state

government.

The advantage to an LLC is that the cost is low and it will serve well for the

early stages of the business.

For family and friends funding, an LLC is a sufficient legal entity for your

business.

In the early days you can use an S-Corp designation with an LLC to defer

taxes to your personal filing.

Delaware Corp

As you move to raise funding from angel investors and venture capital,

some will want to invest in a Delaware Corp.

Keep in mind that it is easy to move from an LLC to a C-Corporation.

However, it’s more difficult to move from a C-Corp back to an LLC.

In most cases, investors will ask for a Delaware Corporation as it’s the gold

standard for legal entities in the US because it provides the best protection

for investors.

37

Note that most venture capital funds have set up their investment

documents to invest in a Delaware Corporation entity. They are not likely

to change this for your business.

When you are ready to raise funding beyond family and friends, make it

clear to investors that you will convert to a Delaware Corporation.

Entity conversion does come at a cost, so make the conversion contingent

on fund closing.

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About TEN Capital

TEN Capital Network provides funding as a service to companies

anywhere raising venture capital. Its network of over 11000

accredited investors represents venture capital, angels, family

offices, and high networth individuals.

©2020 TEN Capital Network

www.tencapital.group

info@tencapital.group