Venture Capital Readiness Guide

Success Tips for Venture Capital Fundraising

For a checklist of items for PROJECT finance, go here.

For venture capital at any stage, a fast and free assessment helps you get oriented: Use In3’s RAIN — readiness and investment navigator [BEING UPDATED for 2024 bankability standards … contact us if you cannot wait until early Oct 2024] then return here for more. Be sure to register your RAIN report on the last page and review the recommendations provided.

When ready for In3’s assistance, review available service options here.

To ensure investor traction, and avoid delays — far too often, otherwise quite qualified venture deals get sidelined during investors due diligence — gather the following financing information, then assemble your package (or polish the one you already have) to “make the ask” for funding.

This checklist helps clarify both the strategy options and practical steps you can take to secure funding without delays, with few to zero “red flags” from capital providers, so that vetting and due diligence proceed as smoothly as possible.  An optimized package will save tremendous time, effort and energy versus “spinning your wheels” by attempting to qualify and raise money using the wrong information, or raise it from the wrong sources, with either insufficient preparation or simply due to a mismatch caused by not meeting investor/lender expectations.

First, some orientation:

1. What’s the purpose of your venture capital raise?

Prepare a clear and succinct explanation of 1) why you require funding and 2) how you will use the funds.  For assistance with creating a Sources & Uses Statement (includes examples on the last page).

There are at least three types of venture capital:
a) seed stage or pre-seed stage capital — used to create business plans and proposals
b) early-stage or startup venture capital (what’s the difference?), or
c) expansion stage, consolidation, or Mergers & Acquisitions funding

Shorter-term working capital or bridge funding, hedge funding, funds for trading platforms, etc., though we do not provide that. We do have partners that provide trade finance (lines of credit), M&A for acquisitions or roll-ups, all are specialists in these respective areas.  Jump to article on all types of funding

Here’s is a further explanation of the main types of venture funding we can help organize and arrange through affiliated investors as part of a capital campaign:

a) Seed Stage or Startup Capital is used for early-stage companies striving to either develop a business (“seed” refers to the pre-operational planning phase) or to commercialize a new innovation in order to reach what VCs call “commercial proof-of-concept” where the business becomes self-sustaining from cash flows generated by the business.

b) Early-stage (pre Series A or Series A) private equity or debt: we specialize in the advisory side in this area, setting up the right fundraising plans and consulting on how to structure the transaction. There are creative options for companies seeking debt or equity where the valuation (share price) is not yet likely to lead to an agreement on terms. We can help solve this and other challenges.

c) Growth or Expansion (corporate), consolidation (rollups), M&A or similar capital is used to expand capacity, enter new markets or make an acquisition, and would typically be repaid with resulting profits (cash flows) over a select period of time — usually not more than seven years.
For growth capital, have a clear financial model showing historical performance (typically the prior 3 years) and how you’ll use the money to reach expansion goals, and repay the loan or benefit equity partners within the stated time horizon.

Working capital is used for short-term needs like purchasing inventory, hiring new employees or delayed receivables; and would typically be repaid during your company’s next full operating cycle – usually within 12 months.  This is not In3’s primary business model, but we can make a referral to a pre-vetted partner that saves you lots of time and trouble from shopping around.

How prepared are you for financing? Use RAIN

2. What Amount are you requesting?

Know how much capital is needed to support specific costs, combining both capital expenditures (CapEx) and operating capital (OpEx) in the initial stage(s) of developing your business or project. This is where proper cashflow analysis will help arrange the “necessary and sufficient” financing, building a financial model that uses IFRS or GAAP accounting standards.  Why is that important?  The more accurate, defensible and ultimately convincing your story, the more likely you will gain traction (expression of interest) from In3 Capital Partners, an arms-length lender or other investor(s).

We can license you the tools you may need to build such a financial model. Ask us.

3. What Capital Types and Terms are you requesting?

Do you seek debt, equity, convertible equity, something else (preferred equity) or a combination of these?  Most ventures use equity or convertible debt, but when there are tangible assets, other options such as senior debt, lines of credit, bridge loans, lease financing (when applicable), or combinations of these into what’s called the capital stack.

It is wise to leverage debt when you can qualify because you’ll give up less equity carried interest.  Using equity only saves interest expense, but unless you can arrange to offer only a modest carried interest, you’d do better to keep more of your own cashflows (net income) and pay back the loan sooner.  On the other hand, if you don’t have to give up control, an equity partner can also be an attractive option when interest rates are high.

Know how long you’ll need the borrowed funds (aka loan “tenor” or maturity date):

• Working capital loans or lines of credit have short-term maturities, usually under one year.
• An asset-based venture loan could have a maturity tied to the life-cycle of the asset, typically three to twelve years.

What capital costs can you afford? Consider the required interest rate (APR) for various types of debt, whether fixe or variable, the loan’s tenor and payment cycle (how long principal repayment can be deferred), any origination or closing fees or points, and timing to deliver the funds. This last point, in particular, varies widely — some institutional lenders can take many months (US DFC is at least 6 months), while private lenders can be just a matter of weeks. Some also can provide lump sum distributions, but most larger loans will be draw on a monthly or quarterly basis.

These details would be factored into an Excel model to show adequate debt service (repayment) reserve, cashflows and acceptable (based on industry standards) Internal Rate of Return, or IRR.  These numbers tell the story and should be used to derive the length of the loan.

Shorter loans increase the debt service burden (larger principal repayments), longer loans increase the total interest paid (increasing the overall cost of capital), but most lenders, including us, do not charge a penalty for early loan repayment, so lean toward longer loan tenors when interest rates are reasonably low.

4. How to stay clear of disagreements about early stage valuation?

We ask and answer this question because it is a notorious sticking point when selling shares (equity interest) in an early-stage venture. Valuations are traditionally a multiple of price-earnings (PE) with standard multiples (2-10x) for each industry. Many other measures can serve as a guide, but they’re all problematic when a company is pre-revenue or just reaching its stride. The past doesn’t equal the future. Claims of hockey-stick growth trajectories are nearly impossible to support, though worth trying to make the case. In the end, to avoid turning off an otherwise desirable equity investor, the best, most “all win” tool is a convertible debenture or convertible bridge, which enables you to sell shares at a future valuation based on milestones reached, no longer just “take my word for it … we’ll become a multi-billion-dollar going concern in X years.”

It also helps to know your current and post-money burn rate and the other financial fundamentals: how your business will repay any loans (cashflows or take-out lender or equity investor), how you will make your projections to deliver attractive returns to equity partners, per the above. Prepare your financial model (ideally, when available, built on previously audited financial statements and GAAP or IFRS-compliant templates, which we can provide as part of In3’s service offering) with cashflow projections as evidence that you can reliably service new debt with on-time payments.  Where do you make the most money — not just revenue, but the more significant margin contribution?

Venture Capital looks backwards, more at historical performance, then at the projected annual income statement and net operating margins (the percentage of earnings that are retained after all expenses, which is tied to the tax venue), and for an exit strategy and/or dividends (or similar gain-sharing), while by contrast …

Project Capital, particularly so for “greenfield” projects that have no operating history, looks forward, more at future performance, which get summarized as the Internal Rate of Return (IRR, levered or unlevered) an indicator of capital efficiency, not just profitability/cashflows.

On the debt side, to qualify for most loans (not required for our flagship project funding program, CAP), there are usually bankability ratios to consider here such as “cash available for debt service” (CADS) and equity/debt leverage, among several others. 

If this seems too much to absorb, you may want to involve a partner trained in finance fundamentals and/or hire a consultant.

5. What kind of loan collateral can you offer?

For senior debt only, know what collateral is available that can be pledged (via perfecting a lien against it) and what is its value. Examples might be real estate (land), equipment, buildings and motor vehicles.  All collateral usually receives a discount of at least 20%. 50% discount for inventory or supplies. If this seems unfair, consider that the collateral would only be used in the event of a default on loan repayment; an effective “fire sale” that disposes of assets at that points would probably not cover the lender’s losses, thus they call get a “haircut”.

6. Are you willing to arrange a loan guarantee?

Be prepared for lenders and some institutional investors to request a loan guarantee when the owners seek limited or no recourse debt. That just means that the lender cannot attach to any assets outside the scope of the company’s holdings, so sometimes they seek what is effectively a co-signer for your loan, metaphorically. This may result in a request for a personal guarantee, corporate guarantee, or both.

This use of a financial guarantee is not new.  Institutional lenders have required them for decades. You may need a sponsor, if this is requested and you and your team lack the asset depth to tether any secured loans. There are always “signature” loans for modest sums, such as credit cards, bank lines of credit, family, friends, co-founders….

Where do you go from here?  See article for how we define “venture” finance (as opposed to project capital, trade finance, corporate/M&A, etc.), and then, if needed, view venture capital fundraising or types of In3 expert advisory services our how to procure In3 advisory services.

7. Components of an Investible Venture Package of Materials

There are four major components to an effective early-stage venture package, necessary to show proficiency to get the attention you deserve:

1. Statement of purpose / venture funding information summary
2. Business plan — see below. Captures the main elements of the business case and shows reasonable risk/reward
3. Financial projections (pro forma financial statements, namely income statement, balance sheet, and cashflow statement)
4. Developer profile — management experience, successful projects completed to date, track record, references, resume and/or CVs.

Each of these areas are outlined below.  Get started using our onboarding system to apply for funds here.

Typical sequence for preparing the above package:

1. Excel financial projections (also called a financial model) — used to determine if there is a feasible business, showing all assumptions are transparent and reasonable, revenue based on market facts and costs based on fair market estimates.
2. Business plan — use the results of the financial modeling to create a business plan that summarizes the business case and adds the narrative of what (defines the core business), why (purpose or mission, including how impacts will be measured), where (site security is less important to venture finance, but still matters), who (bios of key team members, including key vendors, strategic partners, and others), when (implementation timeline), how (highlight any special considerations, risk mitigation, status of any key technology that will be deployed), and how much capital is requested, and from how many sources (a clear sources and uses statement).
3. Executive Summary and other short encapsulations — a teaser, PowerPoint presentation, at-a-glance venture deal sheet, etc.
4. All other relevant support materials — items not included in the above, such as site description, key permits, licenses, articles of incorporation, developer profile (resumes or CVs), key supply agreements, offtake agreements, key vendors, market analysis, risk analysis, critical success factors, how you will measure social/environmental impacts … whatever is needed to complete investor due diligence.

Venture business plans are not an exact science. A good package will tell a compelling story (especially if approaching impact investors) and answer most questions a lender or equity investor may have about your business and the loan requested. It will provide enough information and documentation so that your request is clearly understood and that your capital source can discuss and defend it to its investment/loan committee.

Some smaller firms, such as larger angel investors of family offices, do not have such committees; their decision is based more on the merits of the venture’s alignment with their investment thesis and the “warmth” of the introduction you receive (where “Know Your Customer” or KYC are first and foremost before the deal merits get the time of day). The better sources of capital are nearly impossible to reach if you do not know an insider who can bring in your deal.

7.1 Statement of Purpose / Venture Information Summary

Include a Venture “Elevator Pitch” Summary that addresses:

• Amount — US$ or Euro total budget
• Purpose
• Duration
• Repayment
• Available collateral
• Brief description of the business and positive outcomes as a result of the financing, including measures and targets

7.2 Business Plan

A business plan is the most critical component in your narrative. It should include:

• Business description and vision
• Market definition and analysis
• Description of products and services
• Brief overview of the organization and management
• Construction schedule
• Amount of capital that you’re investing (“unexpended” funds) and/or accomplishments to date
• Site details, permits, licenses, feasibility studies, contractors, CVs or resumes, industry track record, articles of incorporation (include as many Annexes as necessary)

7.3 Financial Statements

7.3.1 Cash Flow Statement

A cash flow statement tracks incoming and outgoing cash each month and is used to project future needs. It’s used to determine the amount of cash your business will have on hand at any point in time.

A package should include a current, twelve-month statement (when available); with monthly, quarterly or annual projections for the life of the loan. The projections should be realistic and supported.

7.3.2 Projected Income Statement

The income statement is a measure of how your business has performed over a specific period of time, usually annual for the number of years of financing (or the life of the loan or critical growth horizon for the company). It measures all income less all expenses and determines the amount of profit or loss generated by the business for the period. Include income statements for the last three years, if available.

7.3.3 Projected Balance Sheet

The balance sheet represents the basic accounting equation:

assets – liabilities = net worth

It’s a snap-shot of business financial capacity at a specific point in time.

For new businesses – the package should include a balance sheet as of your planned opening date, and another set, projected for 3-25 years after your opening date, depending on the life of the loan or other financing.
For existing businesses – include balance sheets for the last three years, if available.

7.4 Developer Profile

A collection of CVs and resumes do not tell the story, but are a good place to start.  Investors and lenders need basic Know Your Customer (KYC) information, plus a detailed understanding of management’s sector experience, successful projects completed to date, instructive failures, track record in the eyes of customers, personal and professional references, online media presence, and “what makes you tick” as this explains the project’s stated purpose, item 7.1, above.

Roles and functions to be performed (or yet to-be-hired) are more important than titles.  Who does what?  What are their qualifications?  What proficiencies, skills, expertise or other exceptional talents are at the table?

8. Loan Packaging Tips

• As much as possible, be brief, to the point, and format for readability.  Make it easy to scan and read quickly through tabular data, columns and rows, an index such as a hyperlinked table of contents.  Do not describe in words what an image can convey more elegantly.
• Emphasize the management strength of the business – your team has the skills, passion and expertise to be successful.
• Add projections with realistic probabilities and substantiated assumptions.
• Bottom line – lenders want to feel they’ll get their money back in the agreed upon time.

9. Lender/Investor Review

How is an application evaluated and (when there is a scoring system) scored? We use RAIN for a first assessment. That data is merely a conversation starter.  Each layer or dimension — financial fundamentals, fundraising situation (team experience, status of business plan, etc.) and risk profile — indicate the probability of securing funding without additional preparation.  When seeking a loan, you must demonstrate to the lender/investor that you are creditworthy (let your documentation speak for itself; do not make unsubstantiated claims or even mention the upside until first establishing a solid baseline, offering KYC credentials and the short version or headline of your company’s qualifications) and show that your business proposal is of reasonable risk. Lenders will be evaluating:

• Character – prepare for a check on your financial status and personal credit history, including your previous loan payment record. Credit enhancement in the form of loan guarantees can compensate for most perceived inadequacies.
• Experience in the type of business and country where the business operates, including your level of responsibility, education and business management training.
• Capacity – sufficient cash flow to repay any loan (financial model must show this with transparent assumptions).
• Collateral – is there sufficient collateral to cover any default scenarios? The pre-revenue and operation phases may require different collateral or security.  Remember that most collateral used as liens are discounted by at least 20% from the fair market value. 
• Financial and management track record – can you demonstrate your overall business acumen and financial or domain knowledge?

10.  Decide on your Fundraising Strategy then test the waters.

We will customize your funding feasibility test using “bespoke” (tailored) strategies and patterns, including the most modern “Lean” (scrums) and similarly practical tools.

Once you’ve used science and accepted feedback from others (who may disagree with you on key points, and admit that they see things differently), you must persist in finding the right investor/partners. DO NOT GIVE UP TOO SOON.  Stay strong. Be bold, but being clever will win the day sooner.

Our job is to help with securing your capital, faster, and at the least cost, as specialists in commercializing new technologies and other solutions to pressing problems faced by society, whether environmental concerns (like climate change or toxic chemical like plastics accumulating in our biosphere) or social issues or challenges like health, toxic relationships (political divides) or social justice and sustainability. Working with In3 Capital Group will get you further, faster, and at better terms.

Menu of options for Strategic Advisory services

In3 Group collaborates with venture firms to ensure the lowest possible risk premium (the added cost of perceived “things that could go wrong” tend to result in a “risk-adjusted” offer, if they see the risk factor as modest and unlikely enough to make any offer) and keep the lowest overall cost of capital as reasonable as possible, while at the same time greatly increasing the odds of success.  More at All Services.

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