MaRS Library Follow-on financing: When to seek additional funding and how
You raised financing for your early-stage startup and have enough money to last for some time. If all goes well, the funds will get you to the next value-building milestone in your business. However, the best laid plans may not unfold as you thought and you may have to bootstrap the business to reach that next milestone.
You’ll need to show new (and existing) investors that you can execute on your plan and that you have reduced the risk in the business. Existing shareholders will also want to see an increase in valuation.
If your startup is meeting its milestones and existing investors have money available for investment, they will likely participate in the next round of financing. Since investors tend to put aside a fixed amount of capital for each investment in their portfolio, they prefer to syndicate and bring later-stage investors into the deal to make sure that the company is sufficiently funded. This is common for companies (such as life sciences and drug development companies) that need a large amount of cash before they generate their own cash from sales, licenses or royalties.
So when do you start fundraising again? The answer depends upon the amount of cash you have on hand. For example, if you raised 18 months of cash and it takes six months (or longer in tougher economic environments), then you need to start fundraising within one year of closing on the most recent financing.
Tips for preparing for the next round of financing
- Most early-stage founders and management want to get on with developing their technology and building their company. Another key aspect of building your business involves making sure that you have enough money in the bank to continue to scale the business.
- Now that you’ve raised financing and built some of your Board and committees, you have some excellent people who can make introductions to other investors.
- Follow-on investors and those looking to partner or acquire your company will also conduct due diligence on your organization. Continue to maintain your books, records and due diligence binders.
- Address any important issues came up during the last financing. Issues can relate to intellectual property (IP), gaps in management or product development. If these issues came up once, they will come up again at the next stage of due diligence. Your best approach is to be prepared.
TSX listing requirements. Retrieved April 14, 2009, from http://www.tsx.com/en/pdf/TSXandTSXVenture_IndustrialRequirements.pdf.
NASDAQ listing requirements. Retrieved April 14, 2009, from http://www.nasdaq.com/about/nasdaq_listing_req_fees.pdf.
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- Skype’s rapid market leadership over Vonage: Same technology, different rates of adoption.
- Key documents for investors and financing: Subscription and shareholder agreements.
- Marketing communications.