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Tips for founders seeking investment in emerging businesses

Posted on 4 April 2023

The first session of Mishcon de Reya's M:Tech Breakfast Series explored what emerging businesses should be aware of when preparing for investment rounds, particularly when it is their first fundraising outside of friends and family.

Here are some of the answers and tips for founders from the roundtable discussion, hosted by Innovation Partner and M:Tech lead Andrew Wolfin and Corporate Emerging Companies Partner Chris Keen.

It’s more than money. It’s a relationship.

Networks, experience and capital are the criteria founders typically prioritise when choosing the investors they would like on their cap table. Yet both sides often overlook the value of a healthy relationship.

As a founder, it is important to remember that there will be times when your investor is heavily dependent on the founder. Their fund’s performance, long-term career progression and ability to raise future funds rely on the success of the business they have invested in.

For that to materialise, a strong working relationship is crucial. One key reason many companies fail is that the business accepted investment from an investor they did not work well with, and the relationship subsequently soured.

Similarly, if a business has a specific vision, then choice of investor is critical. At some point, what a founder is trying to achieve may diverge from the preferred direction of the investor. An investor may simply seek the most lucrative option, whilst a founder may want to prioritise social impact over commercial success.

We often recommend that a founder avoids rushing to partner with an investor if the personal chemistry and business philosophy are not aligned. Identifying a more compatible investor or considering a different path to investment, while accepting steadier growth initially are likely to yield better results in the long term.

Protecting your company’s confidential information during investor due diligence

This issue is not unique to early-stage investment; the risk exists at every stage of company interaction. However, a business getting off the ground can be more vulnerable as it is often concerned about not deterring a potential investor.

Founders can protect their confidential information through a mix of legal and practical, such as confidentiality agreements. As the company grows, they will be able to spend more on legal protection. However, founders may be required to take some form of action if confidential information is compromised. It can be costly to put in place and even more costly to enforce.

In practical terms, it comes down to deciding what you can reveal and when. Sharing information with a potential investor is best done in stages. This allows the founder to assess at each step whether they continue the due diligence process and whether the intentions of a prospective investor are genuine.

Inevitably, it is a question of trust. A staged release will give a founder time to better understand an investor’s motivation and give them the confidence to commit.

Negotiating term sheets confidently

It is surprising how often the dynamic between founders and investors is misunderstood. At an early stage while negotiating term sheets, it is not uncommon for founders to feel that investors hold the balance of power and may walk away if they push too hard in certain key areas.

Some investors may state that the term sheet offer is largely non-negotiable and that it will expire in a very short timeframe. Such expiration clauses are designed to drive quick decision-making and dissuade founders from questioning the terms. We often recommend that founders stand their ground and push back on such short timeframes to allow a proper review of the offer and its key terms.

If a potential investor insists that they could never get the request of a founder past their investment committee, then the negotiation may have reached the limits of what the investor can offer. Conversely, founders should avoid making onerous concessions that future investors will expect will also be afforded to them in subsequent fundraising rounds.

It may help to consider what is influencing a potential investor’s decision-making. They will have already committed significant time and energy to secure their investment committee’s approval to make an offer. It is unlikely that an investment will fall over simply because a founder provides a first set of comments on the term sheet offer.

Founders often underestimate the bargaining power they hold. Be reasonable, but also be assertive and always act in what you consider to be in the company’s best interests.

Why is raising funds taking longer?

Over the last few years, rounds of investments typically took six months, from the first investor discussions to closing the round. However, founders are increasingly finding that the process is now taking longer. This is partly the result of the slowing market (particularly in technology) over the last 12 months.

Many venture and private equity investors have seen value wiped off their portfolio companies. Consequently, they are now undertaking much more detailed due diligence even on early-stage opportunities. As they investigate aspects such as product-market fit and customer acquisition costs more deeply, building an investment case becomes a longer process.

Many founders and their advisors are also finding that the typical six-week period formerly required to close a deal once the term sheet is signed is now nearer to nine weeks. There is no obvious reason why this is the case, as founder teams and their advisors continue to work at the same pace, so perhaps this anomaly will fade away.

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