Financial Planning and Fundraising

One of the core jobs of the CEO is to raise capital and allocate resources appropriately. As your company grows, the best way to do this is to plan effectively. The best way to plan effectively is to build a strong Finance function. In this pre-read, we outline the role of Finance within a startup and the tactics to build an effective Finance function.

The Role of Finance

As you approach becoming a later stage company, your ability to accurately forecast and to make sound financial investment decisions becomes critical to achieving your goals. A strong Finance team will enable you to 1) decompose your business into easily understood input metrics, 2) accurately plan and allocate resources, and 3) make better and faster decisions as a company. 

The modern Finance team is made up of: Accounting, Financial Planning & Analysis (FP&A) and Strategic Finance, and in some cases Business Operations (Biz Ops) teams. We outline the responsibilities of each team below.  

Accounting and Controllership

Accounting and controllership is the foundation of any Finance team. This team spends their time reviewing what has already happened and establishing accurate financial records. Their responsibilities include:

• Financial Statements: Create financial statements based on the company’s general ledger
• Accounting and Audit: Devise technical accounting and bookkeeping processes to ensure controls
• Treasury and Payment Ops: Oversee cash management, AR / AP process, and spend management
• Tax and Insurance: Ensure correct tax accounting and adequate insurance coverage
• Audit: Partner with external auditors to complete the annual financial audit process

FP&A and Strategic Finance

While accounting is focused on historical data, FP&A and Strategic Finance is a forward-looking team. FP&A and Strategic Finance partner with functional teams to devise the company plan and make strategic financial decisions related to go-to-market (GTM) investments, pricing, and partnerships. A large part of this role is holding the non-Finance teams accountable for their plans and metrics. Their key responsibilities include:

FP&A

• Defining the Metrics: Defining the key input metrics alongside business partners
• Planning: Business planning, budgeting, and tracking budget versus actuals

Strategic Finance

• Strategic Decisions: Providing data and support for investment, pricing, and partnerships
• External Finance: Preparing board materials and assisting with fundraising process / materials

Biz Ops

Biz Ops teams provide business insights and analytics to functional teams. They are tasked with helping functional teams make data-informed decisions. Their key responsibilities include topics such as:

• Sales: Partnering with Sales on customer/market segmentation, pricing and packaging analysis
• Marketing: Partnering with marketing on channel budgets, return-on-investment, investment decisions 
• Engineering: Partnering with engineering on investment and ROI decisions

Depending on the company, Biz Ops can operate either within the Finance organization or as a separate function, entirely. There is no right answer. If it is within the Finance organization, Finance partners with non-Finance functions to 1) plan and budget, 2) answer strategic questions, 3) and provide business insights/operational support to their functional partners. If Biz Ops exists as its own function, Biz Ops will work closely with Finance to ensure the Finance and BizOps teams are working off a similar set of inputs/assumptions. It will typically sit underneath the COO or Head of Ops.

We walk through Finance team case studies for Brex and Gusto below. While both teams keep FP&A, Strategic Finance, and Biz Ops in the Finance function, the structure of the teams are different. Gusto combines FP&A, Strategic Finance, and Biz Ops responsibilities into a single role. This creates alignment as it is the same person creating and operationalizing the plan. Brex, on the other hand, separates Strategic Finance and Biz Ops from FP&A. The Strategic Finance and Biz Ops teams at Brex operate much more like an internal consulting team that helps with internal projects. They also own Board Updates, Investor Relations, and Deal Desk.

Example: Finance Team Structure

Team Structure

• Accounting: Financial reporting, technical accounting
• FP&A: Company planning, model, headcount, and budgets
• Strategic Finance: Board, fundraising, pricing, partnerships
• Business Operations (Biz Ops): Cross functional projects like pricing/comp intel
• Capital Markets: Treasury, debt financing, deposit relationships
• Corporate Development: M&A, strategy, competitive intelligence

Organizational Design

• Brex runs FP&A, Strategic Finance, and Biz Ops as separate teams
• FP&A is a planning function focused on forecasting and budgeting
• Strategic Finance and Biz Ops are strategic decision enablers
• These teams do a lot of project based work with teams
• They also have board, fundraising, and pricing responsibilities

Team Structure

• Finance, BizOps, and Strategy (FBOS): Company planning, strategic decisions, operational support to their functional partners
• Accounting: Financial reporting, technical accounting
• Corporate Development: M&A, strategy, competitive intelligence

Organizational Design

• Gusto combines FP&A, Strat Fin, and Biz Ops in a single role
• These teams handle planning, strategic decisions, and operational support
• Mission is to “define and defend the business model while accelerating growth” 
• Define: Identify the key input metrics
• Defend: Plan and ensure adherence to plan
• Accelerating Growth: Help teams make informed decisions faster

Hiring your first Head of Finance

We recommend companies hire their first Head of Finance when they plan to invest significant resources into scaling headcount and go-to-market. A simple heuristic that Josh Reeves, CEO of Gusto, recommends to early founders is to consider investing in a Head of Finance when planning reaches the complexity of “ratios, ramp times, and/or allocating headcount against a roadmap”. For Gusto, this was when they reached 25 employees. A Head of Finance becomes critical at this stage because they help you define the key activity metrics and will develop a more sophisticated approach to planning at your company.

What to Look for in a Head of Finance

While a Head of Finance will need to be able to handle financial operations (e.g., AP/AR) and accounting, we recommend focusing on candidates that excel at the forward-looking components of Finance, which includes planning, capital allocation, and strategic decision making (e.g., How much should our team invest in this GTM partnership). In short, you want a Head of Finance that will accelerate your decision making and help you and the team make better decisions about how to continually improve the business. These skills also translate to fundraising when you need to paint a future narrative for the business.

We have found that the best Head of Finance candidates have the following characteristics:

Experience

• Investment banking or consulting, plus
• Growth equity or private equity, plus
• Strategic Finance or Biz Ops at a high-growth startup

This background combines a solid foundation of technical training (e.g., traditional corporate finance) with the operational lens required to work within high-growth startups. For your first finance hire, cautiously approach candidates that have never worked in startups before as these candidates are usually well versed in analysis, but do not have the experience working cross functionally to create and operationalize a plan. Don’t veto this type of candidate, but test for characteristics that align closely to working in startups (e.g., comfortable with uncertainty and the other characteristics below).

You will notice we don’t mention experience in your specific business model. In our experience, great finance leaders can learn business models. They are experts in dissecting a businesses P&L and coming up with key drivers and inputs. The exception to this rule is financial services where finance leaders need experience in capital markets and credit management. Below is a quote from Michael Tannenbaum, COO & CFO at Brex, on why you shouldn’t use business model experience as a hard constraint.

“It [SaaS] can be learned. Hard to get someone w good I-banking / consulting experience + moved into tech + management, so narrowing to SaaS feels unnecessary as in my opinion SaaS is simpler than fintech for sure and probably even marketplace given the financial operations of those businesses”

Qualities

• People oriented as they will work across teams to devise plans and will interface with investors
• Process oriented as they will need to own cross-functional planning at the company
• Comfortable using data to frame decisions as they will need to help non-finance roles make decisions
• Comfortable with uncertainty as they will support teams to answer open-ended questions 
• First-principles thinker as they will help you devise activity metrics to run the company
• Detail-oriented as they will be a key stakeholder in planning. You need accuracy and 
• Curious as they will need to ask questions to support other functions within the company
• No Ego as the first Head of Finance will need to wear multiple hats to get the function running
• Willing to challenge the CEO and other leaders as they will need to hold other teams accountable

First Head of Finance Examples

Hired Andy Toung at 25 People and ~$1M ARR

• Experience: Banking, PE associate at Silverlake, and Founder/Chief of Staff
• 9 years of total experience prior to joining Gusto
• Silverlake is an “operationally” focused PE firm; great training for planning
• Founder role prepared Andy to operationalize his PE work and wear multiple hats
• Started as a Head of Finance, but wore many hats early on. Andy helped build the legal, office operations, and people function initially. Over time, leaders were hired for each of these roles. Andy is now the Chief Strategy Officer at Gusto

Hired Zach Grannis at 30-40 people 

• Experience: Banking, PE investing at CircleUp partners
• 8 - 9 years of total experience prior to joining Faire
• Strong technical background from banking and investing in PE at CircleUp
• Faire hired a CFO 15 months later, but Zach still leads Finance & Strategy

Hired Ryan Colburn at 100 to 150 people and >$200M of GMV run-rate

• Experience: Analytics at Wayfair, Army Service, Strategic Finance at Blend
• 6 - 7 years of total experience prior to joining Whatnot
• Strong background in planning and strategic analysis (e.g., pricing analytics)
• Whatnot was in hyper growth. They needed someone to formalize planning and build out the function before they hired a CFO. Brought in a CFO 12 months later
• Ryan runs FP&A, International, and Financial Systems and reports to the CFO

It’s important to note that the first Head of Finance for most companies does not scale to the CFO. They will usually lead the function and build out the initial foundations before a CFO is brought into the company.

How to Test a Head of Finance

• Dig deeply into their work background: You want to go deep into their background to test that 1) they can actually do the financial modeling work, 2) they have a clear vision for planning and the function, and 3) they can think strategically about your business. 

• Design a case to test their capability to think about your business: The case should be specific to your company and the questions that are top-of-mind for you. You also need to give them enough context to do the case properly. In some cases, this means sharing data with the candidate. In other cases, this means providing enough context on how your business works. The goal of the case is to test candidates' strategic thinking around metrics and business models. You can test their ability to run and manage planning in the team interviews

• In the case of Scale, they asked the candidate open-ended questions about their P&L
• In the case of Whatnot, they asked the candidate to build a plan for the next 3 years

Example: Scale's Head of Finance Criteria & Case Study

Evaluation Criteria

Able to prioritize and evaluate investments: Track record of building a rigorous process around (a) evaluating all investments above a certain size from departments, (b) working with departments to forecast ROI, (c) evaluate performance against forecasted ROI

Has evaluated and understands existing practices: Has reviewed companyʼs approach on key metrics

Strategic thinking: Forward-thinking on how different business models, pricing structures, etc. impact reporting

Investor reporting: Proactive in identifying value-maximizing ways to report performance to investors and auditors

Cultural fit: 1) Aligned with company investment philosophies and 2) Compelling examples that demonstrate at least 5 of 8 values

Strong external presence/capabilities: (1) Track record of interacting directly with investors, board members and (2) Track record of managing private financing rounds end-to-end (i.e., requiring minimal day-to-day oversight from CEO/founders)

Experience managing a team with a broad mandate that includes:

• Strategic planning, analysis, forecasting
• Treasury, cash management, accounting
• M&A
• Board meeting preparation
  

Audit preparation and experience: Has led a team that underwent a third-party audit

Team management experience: Ability to hire and retain high-performing team and 

experience in managing a team of 10+. Set challenging and productive goals for team, keep team accountable for actions, provide leadership and motivation, provide resources and support, use checkpoints and data to track progress, set up systems to measure

Case Study

Revenue recognition‍
Consider ratable recognition vs. usage (or consumption) based recognition. Assume that a contract can be interpreted in either way. From a business perspective: How do you determine which model to adopt? How do you determine if/when to transition from one to the other? Note: This topic isn't about technical accounting merits of methods, but more about how you think the business should approach this choice strategically.

Cost allocation‍
Companies with large or complex operational aspects (e.g., Palantir, Uber) seem to approach cost allocations in different ways. How should our business think about and approach the allocation of these operational costs between cost of sales and operating expenses?

Top-level metrics‍
ARR (annual recurring revenue) is a standard SaaS topline metric. Some infrastructure companies (e.g., DataDog) have adopted a variant of ARR (e.g., annualized revenue run rate) as a headline metric. Other infrastructure companies (e.g., Twilio) use total annual revenue (though this seems to get called ARR by investors). How should our business think about using this top-line metric—or others like it—over time?

Headcount/OpEx planning
‍Assume that a business has top-line unpredictability, and that massive customer growth deals can also come with near-term price and margin pressure, leading to cash burn unpredictability. How should our business manage OpEx investment given this volatility?

Scaling Financial Planning

As your team grows, planning will become more complex and will require more team input. Naeem Ishaq, CFO of Checkr, describes the transition from early stage planning to late-stage planning as a shift from “a solo player in a band” to a “symphony.” You create music in both scenarios, but one requires coordination across multiple teams and a shift in planning process. We outline best practices to master this transition.

The Evolution of Financial Planning

• Most companies start with top-down planning. Top-down planning is where the CEO/Head of Finance sets objectives and the plan for what they would like to achieve in the next year. This process optimizes for speed. It takes a few days, but often results in a low fidelity plan. This style of planning is done frequently (i.e., a monthly basis) to capture the rate of change in the business and assumptions at an early stage. This is ideal when you are finding product-market fit or just raised a Series A round, but breaks once you start pursuing multiple initiatives across multiple teams over the same time period.

• At around $10M ARR, companies begin to shift from top-down planning to bottoms-up planning supported by top-down guidance. In this approach, the leadership team/Head of Finance agree on a set of priorities for the year and the Finance team builds a high-level top-down plan. From here, the Head of Finance works with non-Finance teams to collect inputs to build a bottom-up plan. There is usually a gap between these two plans. The Head of Finance with the CEO marries the top-down analysis with the bottom-up builds to create a company plan and budget for the year. At this scale, this process should take 30 days at
  • Do not overcorrect at this point. When you first shift, you and your finance lead will manage the goals and the process with some minor input
  • This will continue to change as the company grows and you need to coordinate across teams and divisions

How Segment initially navigated budgeting and planning? Shadow budgets.

This example was originally published on Peter's blog at this link.

Focus, speed and agility are a startup’s best weapon, so internal bureaucracy is a startup’s worst enemy. Budgets implemented without a clear purpose are definitely unnecessary bureaucracy. So we’ve tried to implement budgets only as-needed, to solve specific problems and eliminate bureaucracy.

As we grew past 30 people we started to notice that team leads were nervous to spend money without some sort of approval, or at least a casual “yep, go for it!” That meant we were moving slower on everyday decisions. Our goal was to enable team leads to spend money as they saw fit, without a complex or unclear approval process. We also wanted a reasonable prediction of how much the company was going to spend over the next 6–12 months.

Initially, we tried implementing full-on budgets as a way to get predictability & enable team leads to spend money. The team leads were responsible for putting their budgets together. Unfortunately, this turned out to be WAY too much overhead, at least for a young team that wasn’t yet familiar with budgeting or balance sheets.

Instead, we ended up settling on what we call a “shadow budget”. Every quarter our CFO uses the past month’s expenses and the team lead’s hiring plan to create a model of how much money we expect them to spend in the next 3–6 months. Then the shadow budget for every team flows up into an overall company shadow budget.

Team leads are not accountable to this budget; it’s just a model that “shadows” reality as best we can. It gives us a guide for comparing what we anticipated vs. reality, quickly revealing any surprises. It’s also a chance to familiarize the team with company financials without burdening them with a full-on budget-planning process. Marketing will be the first part of the org to get a full-on budget, as encouragement to continue growing quickly and also a guideline for spending responsibly.

• As you scale from $10M to $50M to $100M ARR, the framework stays the same but will become increasingly supported by bottoms up planning. Companies will also invest in long-range planning (3 year plans). At this stage, companies will take 45-60 days to lock-in their annual plan versus 30 days because teams are larger and coordination is more difficult.

The outputs of planning in the early growth stage are:‍

• ‍Annual Plan/Budget: The roll-up of financial resources needed to support achievement of the plan. This is typically done annually‍
• BudgetvActual, Forecast: Rolling updates to the budget based on actual results (monthly, quarterly)‍
• OKRs (Objectives and Key Results): Aligning the budget to specific OKRS drives alignment

As you scale to $50M-$100M ARR, you will introduce the following:

• ‍Long-Range Plan: Lays out the direction and goals of the business for a longer period (2-3 years)

Financial Planning Best Practices

• People and process: You need to design a time-boxed process with a single owner that is responsible for driving the annual financial planning process. In most companies, this is usually the Head of Finance. The owner sets a tight calendar and coordinates with each team to make sure inputs and data points are collected on time. At the $5M-$15M ARR stage, try not to spend more than 30 days planning. If the process drags, velocity will slow down as teams spend more energy and resources planning as opposed to executing. Remember that every plan is wrong. Don't let perfect get in the way of progress.

• Understand the inputs that drive outputs: Successful planning is driven by clearly identifying the input metrics that drive your financial goals. A Head of Finance will work with each team to identify the right activity metrics to drive financial results. This is important because it connects the financial goals with the actual work being done. Employees are more likely to be motivated by input metrics compared to financial metrics. 

Example Output: New ARR | Example Inputs = Sales Qualified Leads, Conversion %, Land Seats

• Ensure strong buy-in from the team on the strategy and goals set by leadership: Given you need to communicate top-down direction, the leadership team and their direct reports need to understand and believe in the strategy you lay out to commit to a plan. Therefore, taking the time to clearly explain these goals in forums like weekly all hands or your leadership meetings is important. Be creative about how you message goals to the company. Below are case studies from Instacart and Zepto on using metrics effectively.

Example(s): Driving Buy-In with Metrics

‍

Ravi Gupta joined Instacart as CFO in 2015. When he joined, the company was losing $20 per order, burning $20M per month, with less than 12 months of company runway.

Ravi realized they needed to fix their unit economics to ensure financial independence. He also knew that most employees wouldn’t be motivated to fix unit economics. He needed to figure out a way to create buy-in from the team while achieving the profitability goal.

His tactic was to translate financial metrics into drivers that employees cared about. For unit economics, he focused employees on delivery time instead of Gross Margin because there was a direct relationship. To further reinforce this connection, he made everyone at the company t-shirts that said “every minute counts.” For every delivery minute saved, unit economics improved by 25c.

10 months later, Instacart reduced delivery times by 40 minutes and reached break-even unit economics. This helped create momentum and morale within the company.

‍

Framing questions with constraints is an exceptional way to drive outcomes you want.

Zepto wanted to improve unit economics without increasing delivery fees for customers. Many competitors had relied on fees to reach profitability and fees are directly correlated with lower propensity to buy and a worse consumer experience.

In planning, Aadit, the CEO of Zepto, set constraints to drive the correct behaviors. With delivery fees, he asked the team to “improve store-level EBITDA per order to X without increasing delivery fees for our customer.” This forced teams to be creative because they could not rely on customer-facing fees, like every other company in India. As a result, teams improved unit economics by maniacally focusing on reducing variable costs per order, growing an advertising business, and improving product sourcing to increase product-margins. 

Through these tactics, Zepto scaled to break-even unit economics while maintaining delivery fees that are roughly 50% of the competitive set. Zepto boasts industry-best retention and usage. 

• Adjust the planning to cycle based on your confidence level: Jason Child, Ex-CFO at OpenDoor and CFO at ARM, suggests planning for a time period where you have  70% confidence in your forecast. This might be 6 months or 3 months. In practice, you will set annual targets, but only bottoms-up forecast a shorter period. Zepto, a retail company in India, initially forecasted at 3 month intervals given the rate of change in the business. OpenDoor, a proptech company in the US, started with a 6 month plan tied to annual goals because they had 6 months of visibility. 

• Planning is about truth seeking to allocate investments effectively: The Head of Finance (or the person that is leading the process) needs to act as a neutral and independent party in planning. It is important they are able to frame questions with data to push back on plans that are too conservative or too aggressive. Through this independent assessment, they are able to help the company make better resource allocation decisions for your planning cycle.

• Don’t get lost in the spreadsheet. Optimize for flexibility and speed over absolute precision. Every plan is wrong. Great planning minimizes how wrong you are while minimizing time spent planning.

Example: OpenDoor's Planning in 2018

Overview

In 2017, Opendoor (OD) was in its third year of operation. OD buys and sells Single Family Residences between $175k-$500k. 

• 2016:  As a part of its fundraise, a top-down plan was created by the CEO and Head of Capital Markets.
• Jan 2017: CFO and Director of Financial Planning and Analysis (FP&A) were hired
• Apr 2017: Reforecasted creating a bottoms-up monthly plan - taking down the plan that the CEO created for the fundraise. Instead of doing annual planning, they continued with a monthly and quarterly planning process for the rest of the year
• Oct 2017: Kicked off the planning process to create the first annual plan, rather than continuing with the monthly/quarterly planning process. OD used a combination of top-down and bottom-up in their first annual plan

2018 Annual Planning Process (Started in October 2017)

• Day 1: Align on overall objectives with the leadership team
• Day 15: Send summary of objectives and top-down targets, with instructions to each non-Finance team lead to collect bottom-up inputs
• Day 30: Collect inputs for bottom-up model from non-Finance team leads
• Day 37: Compare the outputs from the bottom-up and top-down models. Summarize the differences for the leadership team  
• Day 40: Senior team reviews differences and agrees on a final plan
• Day 50: Finance incorporates feedback and Senior team gives final approval
• Day 60: Final 2018 plan reviewed and approved by Board of Directors
• Day 65: Final 2018 plan shared with the rest of the company 

Forecast Horizon

While OD built an annual plan, they chose to forecast the first half of the year more intensely. They agreed to revisit the second half as the year progressed. They made this decision because they could only accurately forecast 6 months at a time 

Raising Growth Capital

Both growth investors and early stage investors evaluate the same criteria. Regardless of stage, investors are evaluating you and your team, TAM, performance to date, and future potential. That said, fundraising at the growth stage will be different from your early rounds. The main reason is growth stage investors are model driven and will not give you credit for performance without evidence. Simply put, they weigh performance to date more heavily than early stage investors in their decision making framework.

Growth fundraising non-negotiables

• Build relationships with investors for 6-12 months: Not building relationships with investors prior to a fundraise is one of the main failure causes in growth-stage fundraising. Growth investors are writing $20M to $100M checks and require time to build their thesis on the company and the founding team. We recommend identifying 5-10 investors you think could be great fits for your company and meeting with them quarterly 6-12 months before your next fundraise. This serves two purposes: it helps you assess the suitability of a potential board member and ensures that the investor doesn’t enter your fundraising process without context or a thesis on the business.

• Fundraise on your own terms: You want to fundraise at the point of maximum momentum for your business. Tactically, this is when you have 1) investors chasing you (e.g., proactively helping, asking to invest) and 2) strong metrics and a clear use for the capital. Don’t ever wait until you need money (e.g., <6 months runway)

• Take 6-8 weeks to prepare materials: Growth investors are more data oriented. As a result, a great growth-stage fundraise requires preparation. We recommend taking 6-8 weeks to prepare materials ahead of time. You’ll need to put together a 1) pitch deck, 2) a data room, and 3) a financial model. A great Finance leader or team is critical for this process. 

Data Room and Model Best Practices

Data Room
The fundraising data room includes data an investor needs for business diligence. At a minimum, this should include the metrics that you use to track the health of your business. In general, this includes metrics related to growth, customer health (retention), unit economics/acquisition, and financial performance. Below is an example Data Room for a Series B fintech company. 

Overview

• Data Room README (a short guide on what is included)
• Pitch deck and/or Memo with the narrative, opportunity, and why you are raising

Growth and Customers

• 1-2 page document outlining current growth and plans for next 12-24
• TPV, total accounts, and active users by market by month
• Revenue and gross take rate % by market by month
• Contribution Profit and net take rate % by market by month
• TPV/User, Revenue/User, Contribution/User by market by month
• Monthly retention by market by month

Customer Health and Engagement

• Monthly active user cohorts based on transactions
• Monthly TPV, revenue, and contribution profit cohorts 
• Monthly transaction TPV/active, revenue/active, contribution/active cohorts

Unit Economics and Treasury

• New Signups and New Active Users by corridor | split by organic and paid
• Total marketing spend and $paid CAC and $blended CAC by corridor by month
• Contribution Profit Cohorts versus marketing spend in each signup cohort
• Separate Contribution LTV and CAC Payback analysis

• Calculate 1, 2, and 3 year Contribution LTV based on user behavior
• Compare to initial CAC (including cost to onboard)

Financials and Capital

• Historical and Forecasted Income Statement (Include financial metrics, key drivers)

Other

• Latest summary captable

If you would like an example Data Room for your specific business model, email us. 

Model (included in the Data Room) 

• Build a 3 - 5 year model based on activity drivers
• Every investor will build their financial model based on these activity inputs
• This helps investors contextualize how you get from $5M to $50M to $500M of ARR

How aggressive should the model be?

Make the plan aggressive, but not unrealistic. If your internal planning is done correctly, the plan will be similar to the stretch plan for your team. 

The worst outcome is when a new investor agrees to invest based on a fundraise plan and is surprised by a much more conservative board plan during the first board meeting (e.g., The fundraise model predicts $100M ARR in 2024, but the board plan predicts $50M). This is not a good way to kick off a trust-based relationship.

• Run a tight process: You want to start all investors at the same time and run a 1-4 week diligence process. Don’t set a hard deadline, but let people know you plan to collect term sheets in a few weeks. Your job is to keep everyone moving during the process, so you can maintain competitive tension

Tactics for a Tight Process

• ‍Focus your attention on the high-signal investors. The best signal for who is actually interested is their velocity of requests and follow-ups. An interested investor tries to speed you up rather than slow you down. Trying to resurrect slow-moving investors is a lost-cause. Focus the majority of your attention on answering the questions and concerns of these high-signal investors‍
• Keep track of all requests in a spreadsheet. Expect a barrage of requests from investors. Track all requests and responses in a spreadsheet with a single tab for each investor. This is an easy way to see consistent questions from investors and track who is actually doing work‍
• Use investor momentum to your advantage. Keep investors moving forward by using other investor milestones. As other investors progress, use their progress as a check-in opportunity for investors to keep everyone at the same point in your process. For example:‍
  • Investor A tells you they are taking the deal to their investment committee
  • ‍Investor B is doing work, but is not moving as quickly as Investor A‍
  • Email Investor B saying other investors are getting close to a decision and ask if there's anything you can do to help them make a decision. Reiterate that you have enjoyed getting to know Investor B in the process. Ensure any additional deliverables they request are followed-up on promptly

• Ask for less and raise more: Do the math to figure out the minimum capital you will need to hit your goals over the next 18-24 months. Ask for this amount and raise more if there is interest from your prospective investors. We have seen many investors pass because the company asks for too much money ‍
• Do not signal valuation: Investors will do everything in their power to get you to signal a price. In most cases, do not do it. The best way to respond is to tell the investor you are optimizing for a great partner and a fair and reasonable price that will be determined during the process. The exception scenario is when an investor asks you to name your buy-it-now price so they can lead the round. If the investor is your preferred partner, we recommend suggesting a valuation that you would accept

Example: Brex Fundraising Process

Relationship Building

Henrique, co-CEO, and Michael, CFO/COO, dedicate consistent time to nurture investors. 

“Get investors to fall in love with you before the fundraise.” - Michael Tannenbaum, Brex

Before The Process (6-8 weeks before)‍
Action: Alignment

• Internal stakeholders align on process and goals for the fundraise
• After internal alignment, get external alignment from board of directors

Deliverable: Memo outlining the internal agreement amongst the leadership team

• Who: Leadership team, Fundraise team
• What: Agree on goals, plan, timing, size, target investors, and team involvement
• When: 6 weeks before fundraise
• Why: Everyone understands the plan and their time requirements

Action: Create Materials

• Data Room
• Model
• Investor Presentation

Deliverable: Data Room with presentation, model, and key KPIs (see below example)

Action: Prepare

• Sync with the Fundraise team on talking points
• Get input on materials from advisors and existing investors
• Prepare customers for references to start during the fundraise

Deliverable: FAQ on potential investor questions, list of acceptable references

• One way to lessen the amount of customer time required is to create a series of case studies via Loom with your customers ahead of the fundraise. This way, you can save actual customer time for investors further in the process.

During the Process‍
Action: Investor Preparations

• Set up a pre-meeting to update investors on business
• Let investors know a formal process will be kicking off soon

Deliverable: List of top investors nurtured before a fundraise, pre-process meetings

Action: Fundraise

• Open the process. Brex aims for 1-2 weeks, but 2-4 weeks is likely in this market
• Answer questions & answers to get investors to a decision 
• Evaluate term sheets and sign with your lead investor

Deliverable: One lead to “project manage” the fundraise, high-velocity responses

Closing the Process

• Once a lead investor is selected, fill the round with non-lead investors 
• Complete legal diligence with lead investor and move quickly to closing

Growth Investor Diligence Process

As stated above, growth stage investors are more metrics driven than early stage investors. Secondarily, they are writing much larger checks so the amount of work that goes into a new decision is significantly more than a seed or Series A investment. Below we outline what they are looking for and the work they do to make a decision. 

What return do early growth investors target?

Typically, growth investors target a 3x to 5x return on invested capital in a base case scenario. In practice, this means they are looking for the valuation of the company to appreciate by 3x to 5x, after accounting for future dilution, within 5 years. This requires growing the business more than 3x to 5x because of 1) dilution from employee option grants and future rounds and 2) valuation multiples will decline as you approach becoming a public company.

We outline this dynamic below

• Company “A” raises $30M at a 30x ARR multiple. New investor receives 10% ownership
• The investors ownership is diluted by 10% by exit due to options and new fundraising rounds
• To generate a 3x to 5x return at a 10x ARR multiple, ARR needs to grow 10x to 17x from today

A 3x to 5x return alone is often not enough to get a growth investor to commit to investing, particularly in your Series B and Series C rounds where investors are searching for upside beyond traditional growth returns. An early growth investor will want to see upside by understanding how the core plan could be too conservative and the future acts you might pursue that are not in the core plan. They’ll model these scenarios in an upside case. 

‍What are growth investors evaluating?

Growth investors and early stage investors care about the same characteristics. Regardless of stage, investors are evaluating you and your team, TAM, performance to date, and future potential. The only difference is the growth stage investor anchors more on what you have already achieved to inform what is possible in a future scenario. A growth investor is much less likely to give you credit for something that does not exist yet or has no early evidence from tests or experiments.

Growth Investor Process Overview

1. Proactive research before a fundraise. Growth investors will spend 1 or 2 months before a fundraise conducting proactive research. Investors will run surveys, call customers, and conduct outside-in TAM research to develop an initial view on the company before the pitch
2. ‍Triage diligence. After the process starts, investors will review your data room to combine their initial view with data on company performance. Their goal is to 1) understand the health of performance to date, 2) build a model outlining future potential, and 3) determine initial valuation expectations. The output of this work is a diligence presentation (30 to 40 pages) and will take about 1 to 2 weeks‍
3. Deep Diligence and Investment Committee. If everything looks good in the initial diligence, investors will work with you to answer remaining questions and refine their investment model and valuation perspectives. The output of this work is an investment memo and will take about 1 week. In the interim, investors will schedule a formal Investment Committee to make a decision on the investment‍
4. Decision. After the investment committee, an investor will make the decision to invest or pass. They will quickly communicate their decision after their meeting. If they decide to invest, expect the investor to put pressure on you to close quickly. Take your time and don’t rush. Instead, use the term sheet as a mechanism to get other investors to the finish line. Make certain you know all your options before you make your final decision 

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Example: Faire Series C - Diligence

Triage Diligence

We spoke with 10-20 retailers and brands on Faire. This gave us visibility into why customers used the product, what alternatives it replaced, and whether they planned to increase usage over time. We realized that retailers were adopting Faire more rapidly and there was significant opportunity to continue to grow “spend” on Faire over time. We also looked at external data to size the TAM by product category. We shared our research with Max as part of our process.

Assess performance to date

• Evaluate growth durability (i.e., is growth consistent, are channels diversified)
• Customer and usage retention (i.e., is retention healthy, are customers expanding)
• Marry quantitative retention with qualitative customer feedback
• Develop a perspective on unit economics (i.e., CAC payback, future GTM)
• Review capital efficiency (i.e., Are there signs of operating leverage)
• Follow up calls with management team after initial review data

Assess market

• 2nd attempt at Market Sizing today and in the future
• Identify market risks (e.g., Shopify, SMB) and evaluate mitigants to risk

Assess team

• Evaluate founding team and initial leadership team
• Collect feedback from initial back channel checks

Assess initial valuation

• Build v1 driver based model across multiple cases 
• Work backwards to determine valuation and spot check with multiples

Output

• Diligence presentation (30-40 slides) prepared for internal team discussion

Deep Diligence, IC, and Decision

• Discuss remaining questions with company fundraise team
• Refine model and downside, base, and upside case scenario
• Finalize valuation perspectives and test valuation with company before committee
• Prepare memo for discussion with Investment Committee

Output

Investment memo that outlines:

• Company and Product
• Diligence summary (market, team, performance)
• Current Thesis
• Summary of the merits and risks
• Management forecast and investor scenarios (base, upside, and downside)
• Investment returns (under each scenario)