Business Bullets - Finance

Raising funding for a startup is hard. There's no question about it: raising capital from angel investors or venture capitalists is a huge hurdle for almost every startup out there.

The reality is that very few startups are successful at getting funded. UK Funders – which tracks a lot of angel investments – notes that only 3% of deals its angel investors looked at ended up raising financing. So the odds aren't good. And truthfully, not every startup needs funding, you can always bootstrap or raise "friends and family" money. But for those startups and entrepreneurs that are going to raise venture capital or angel investment, you need to be as prepared as possible.

There are numerous great resources out there to help you raise venture capital or angel financing. But there are some parts of the process that few people talk about and they're important; especially for startups raising money for the first time.

1. Signing a term sheet is only step one. Of course there are many steps involved in getting a term sheet. You'll submit an elevator pitch (followed by a bunch of other things), have numerous meetings, negotiate, etc. — all before you get the beloved term sheet. Getting a term sheet is a significant milestone but if you think the process is smooth sailing after that, think again. Post-signing of the term sheet is when the real work begins!
2. It might not be worth negotiating the finer points of the deal at the term sheet stage. The fact is, everything can be changed once a term sheet is signed, so negotiating on the finer points of it may be overkill. You may push hard to have very specific language in the term sheet only to realize when you get to the real agreement that it will be re-worded anyway. This doesn't mean you shouldn't negotiate for what you want and believe in, but recognize what the term sheet is: a letter of intent to invest, not a binding or absolute contract.
3. Due diligence is an "interesting" process. And for most entrepreneurs it's a completely foreign concept and frustrating experience. You've just got a term sheet, you're excited, you're ready to roll, and suddenly you get a rather extensive list of questions and deliverables the venture capitalists would like to see.
4. The paperwork is extremely detailed and extensive. Maybe this won't come as a surprise (because legal documentation is in a special category unto itself), but when the closing paperwork for your financing is in a folder so heavy it'll collapse your desk...that's something! And even with good lawyers on your side to wade through things, there's a good chance you'll be neck-deep in legalese!!
5. Most of the deal focuses on negative details. This is the sad truth of legal documentation and contracts. Most of what you'll negotiate, and most of what will be found in the contract between you and the venture capitalists is there to account for potential problems. This can be frustrating because you want everyone on the same page; everyone's excited and eager to turn the business into a success, but here you are negotiating what to do when things go pear shaped.
6. You pay all the legal bills. This is pretty standard practice, although others may tell me otherwise...but it's something that first-time entrepreneurs wouldn't expect. You pay the legal bills of the venture capitalists. So they hand you the money, only to require that some of it go right back (to the lawyers.) Of course you pay your own legal bills too. The best advice I can offer is this: Find out what others are paying to close similar sized deals and try to get a cap on fees.
7. Don't just focus on how much you're raising and what chunk of the company you're giving up. The amount you're raising and what you're giving up in terms of ownership are extremely important, but there many other things to think about as well. For example: the composition of the board of directors.

For entrepreneurs raising money for the first-time there's no experience quite like it, nothing to really draw a comparison to. The best thing you can do is find others that have done it before and get their advice — get them on board as advisers if need be. Find a lawyer with experience in these kinds of deals, especially within your industry. And educate yourself.