The Process of Raising Private Investments for Startups

raising private investments for startups

Fifth and last post of a series with all you need to know about private investors for startups and small businesses.

In this series of blog posts I’ve been deep diving into 4 sources of investment money: 

  1. Friends and family, 
  2. Angel investors, 
  3. Venture capital (VC), 
  4. Late stage venture capital.

My goal was to help you make the right funding decision – what kind of startup funding options are available in different stages, what the strategies are for pursuing them, and how founders can determine a funding path that is right for them.

In the previous post I’ve looked into raising investments from late stage VCs, whereas this last post of the series is dedicated to the general process raising private investments.

Investment timeline

Founders should bear in mind that it will take 1-18 months as an average to finalize the investment round. Angels might take 1-3 months, whereas VCs up to 18 months. VCs might want to “observe” a company for a longer amount of time before investing, so it’s important founders keep the company visible in the different portals and post regular updates like how the company has been doing financially in the last quarter etc.

The typical investment timeline looks like this:

Let’s take a look at each of the steps now.

The elevator pitch 

The first thing a founder needs to send to an investor is an elevator pitch. The elevator pitch isn’t a sales pitch. It’s a short, well-crafted explanation of the problem a startup solves, how they solve it, and how big of a market there is for that solution and what sets them apart from other competitors. 

Founders don’t need to “sell” the product. The opportunity should speak for itself.

So, the following are the essential factors that a private investor looks for before investing in any business:

  1. Idea or Product: The investors look if the business idea or the product is an original work. They look for it to have distinctive features that sell in the market.
  1. Business Plan: Investors examine the business plan, including its marketing analysis and product features.
  1. Management Team: A capable team is an essential element for running a business successfully. Investors look if the management team has the necessary commitment and experience to meet the objective.
  1. Cash Flow: Investors generally do not invest in a company that barely has turnover or generates a profit. While assessing the firm, they look for earnings before interest, taxes, depreciation, and amortization, known as EBITDA.
  1. Liquidity: The firm may not pay its debts if it doesn’t have any liquid assets. So, the investors need assurance before investing in a company. They ensure that the company stays within the liquidity agreement.
  2. Expenses: High expenses can ruin a startup. Investors look to see if a business has an expense control system to keep the unnecessary cost in check.
  1. Metrics: A business metric is a quantifiable criterion used to track, monitor, and assess a company’s success or failure. There is no one-size-fits-all scale. Different investors use different indicators to measure success, although most often these criteria have monetary value i.e. financial track record etc.

Private investors want to look at these indicators to see how the startup is performing in the market. They would want to know how they could get their profit from the startup when the time arrives.

The first response 

When and if the investor responds to an email, the founder will either get a short “no” or a request for more information.

Most angels will request either a one-pager executive summary or a pitch deck. The pitch deck is a 10-15 slides synopsis of the business plan that covers things like the problem, solution, market size, competition, management team and financials. Investors like pitch decks because they force the founder to be brief, and hopefully use visuals instead of an endless list of bullet points. The pitch deck is the founder’s friend and most trusted ally in the investor pitch process.

At this stage, the investor isn’t interested in finding out as much information as possible about the deal at this point. In fact, they are looking to find out as little information about the deal to determine whether or not they want to spend more time with this startup.

It’s not a good idea to overwhelm the investor with every last piece of information ever collected for fear of them “not seeing everything.” They are likely reviewing a dozen other deals at the same time so they couldn’t review everything, even if they wanted to. Founders should simply let them know that more information is available upon request.

The pitch meeting 

Once the investor has reviewed the founder’s materials and determined they are interested in meeting with the founder, the next step is to arrange a time for a pitch meeting.

For angel investors especially (but for VCs to some degree as well), the pitch meeting is more about the investor liking the founder as a person than it is just pitching the idea. So, founders should take a little bit of time to try to establish some relationship with the investor even before and after the pitch.

During the pitch, the founder will run through their pitch deck and answer questions. The goal isn’t to get to the end of the pitch deck in 15 minutes or less. The goal should be to find an aspect of the business that the investor actually cares about. If the investor wants to spend 60 minutes talking about the first slide, the founder shouldn’t rush them.

The financials 

Of all the documents that a founder is going to be expected to be armed with, the financials are the most important.

Most investors are going to expect a reasonable five-year projection of the income and expenses of the business.

They’ll want to know how quickly founders will be able to get the startup to break even. They’ll want to know what founders intend to use their money for. And of course, they’ll want to know how founders intend to give it back to them with a healthy return.

Founders should be prepared to provide an income statement, use of proceeds, and breakeven analysis at the very least.

The goal of the private investor pitch process

The goal of the first few meetings isn’t to “close” the investor, it’s to establish a relationship that will naturally lead to a close.

The investor isn’t someone looking to buy a product.

Founders should be themselves. They should represent the opportunity and their passion for business. That is all they need to convince private investors to do a deal.

The term sheet

A term sheet is the first formal, but non-binding, document between a startup founder and an investor.

A term sheet lays out the terms and conditions for investment. It’s used to negotiate the final terms, which are then written up in a contract.

A good term sheet aligns the interests of the investors and the founders, because that’s better for everyone involved (and the startup) in the long run. A bad term sheet puts investors and founders against each other and that is not good for business growth.

Even getting a term sheet isn’t the same as finalizing the closing legal documents that the term sheet outlines.

This involves a great deal of back and forth between the attorneys from both private investors and founders and can easily take 30 to 60 days to complete if it gets done right. It’s not unusual for this process to go over 90 days, but if it starts dragging over 120 days, the deal runs the risk of falling through.

Due diligence

The last item is kind of a catch-all that we’ll call “due diligence.” When the investor gets more interested in a deal, the next phase of discovery is called due diligence.

During this phase they will dig into all the details of the business, from financials to the details of how the business model works.

This is where all of the research and support the founder has put together will be put to the test. They’re likely going to ask founders to prove how they arrived at the market size they’re going after.

The due diligence possess can be broken down in 3 parts:

  1. Legal due diligence (regulatory risk, shareholders agreement, cap table, personnel & hiring, invoices, articles of incorporation),
  1. Technology due diligence (maturity, tech-stack, competitors review, IPR, software/hardware testing),
  1. Financial due diligence (historic & forecasts, split of proceeds, sales and funnel metrics, CAC ratio, Churn, CLTV).

Founders may get asked to have their early customers talk to the venture capital firm. Assume the investment firm is going to do its best to make sure everything the founder said actually checks out.

It’s only after the due diligence is completed that the investor prepares the shareholder agreement with the founders. That is the last step that seals the deal before writing the check.

Final thoughts

Every startup is different, and so is the ideal funding path. Usually founders start by raising early-stage capital from friends and family and angel investors to validate their value proposition, build initial traction and find their first customers. This is what investors refer to as: “early product-market-fit”. 

Later, the more mature scale-ups turn to VCs and private equity firms to consolidate and speed up their growth. This often goes hand in hand with their internationalization and foreign markets outreach.

Additional funding alternatives from different sources are best suited for different startup stages. Choosing the right one can give you the boost you need. The wrong one might hold you back or lead you in the wrong direction.

Get in touch with us to find out how we can help you in your fundraising round.


Marco Torregrossa is private investments advisor for Innovation Manager Finland Ltd. Follow him at @MarcoTorreg