Business Tip - Closing a Startup Financing Deal
Fundraising for startup businesses is typically a slow and painful process. Most entrepreneurs would rather spend time growing their business than making fundraising prospect lists, scheduling pitch meetings and asking for money.
Unless you have a track record of business success or excellent sales ability, the reality of fundraising for many first-time business owners is that it takes contacting at least four to five prospects before you can close your first investor. But this poses a challenge since most entrepreneurs need at least 10 investors to put together a meaningful round of funding--and the process of assembling 40 to 50 fundraising prospects is daunting. So what's an entrepreneur to do?
Pick a closing date, then don’t enforce it. When raising large sums of money from venture capital firms and institutional investors, closing dates are critical. The interest income on $50 million is about $50,000 per week (which is approximately the same amount as the total legal fees on VC rounds), so the cost of a closing delay is a substantial. This explains why your lawyer will give you financing documentation for your startup round of funding that has a closing date clause.
In practice, angel investors and other individuals who'll support your business will ignore your closing date and send you the money when they feel like it. Unless you're convinced that your financing round will be oversubscribed by too much demand, your closing date is likely to be a moving target. Nevertheless, investors like to see a closing date because they like to feel that other investors are interested in your business and investing at the same time.
You should ask your lawyer to modify the standard closing date clause to read “The closing date is [some date in the near future] or another date that is mutually agreeable to both parties.” This small change will keep the documentation valid for several weeks after the closing date in case your investor takes extra time to give you the funds.
One of the greatest challenges that entrepreneurs face is answering the question posed by your prospects, “How many other investors are committing money at this closing date?” The smart answer is to avoid giving an answer, since trying to close several individuals on the same date is a long shot.
Don’t forget to ask for the check. When raising money, it's easy to get tied up in answering the questions posed by the investors, then get tied up in the negotiations and paperwork, then get tied up in making sure the relationship with your investor continues to be sound after the negotiations are complete. During all these interactions, it's also easy to forget that the purpose of the process is to get the money. You may find that you'll get the funding more quickly if you ask for it earlier. One way to ask for the check is to ask your investor whether he plans to make a wire transfer or send a personal check so you can decide if he needs to receive your bank wire transfer details. It might be presumptive to ask this question too early, but it tends to move the dialogue along very quickly. And remember, the deal isn't closed 'til the money's in the bank.
Source: Asheesh Advani, Entrepreneur.com
