When investors review funding requests from the founders, experienced angels have prerequisites to be met and certain documents to be readily available. Some are more crucial than others of course, and when founders are not prepared for this key information, the consideration process gets dragged unnecessarily, and sometimes the investment interest may wane, especially if founders take some time to reply.
What I expect founders to provide readily during the fundraising discussions:
1. Starting up Details (incorporation, website, official email address, etc) – very unlikely for investors to invest in concepts or ideas alone (and seldom into founders who are not fully committed to the business.) Founders could claim they are fully committed; we just need to see “evidence” of the commitment and intention. Incorporation, websites, and even URL registrations give us an inkling of how serious the founders are.
Candidly speaking, it’s not hard to incorporate an entity nowadays and with so many no-code tools, not knowing how to code is not a valid excuse to not have a website. A tad oversimplifying it, but it’s hard to believe that the founders are really serious about this business they intend to build if they can’t get these basic hygiene factors sorted.
Another interesting but disturbing observation – founders’ LinkedIn profiles are not updated to reflect the commitments they are fundraising for, and once, I found a CTO with multiple CTO-level commitments which the other co-founders are not aware of. As early investors, it’s crucial to us that the founding team is dedicated as A TEAM.
2. Investment Deck – this goes without saying, I suppose. And I had previously written what a good pitch deck should cover. A quick summary without repeating myself – a good pitch deck answers WHY you are the founder(s) in the chosen space, and WHY the particular chosen vertical/problem is worth solving.
It’s important that founders do not confuse a sales deck and an investment deck. The most extreme investment deck that I came across – it was almost 100MB! I opened it out of curiosity and I almost deleted it right away. It was close to 100++ pages long (ppt) and was more a sales-demo deck (full of feature screenshots and user and product details) One way to help founders differentiate between sales deck and investment deck – think of founder/company as the “product to promote” in the investment deck (vs. the sales deck is used to sell your product/service)
Another common ‘mistake’ I encounter is usually on the TAM/SAM/SOM section. Many simply quote some global reports to show the potential (total addressable market) of the space and estimate their SOM using unit prices they intend to charge. So I would joke, then you can easily double your SOM when you double your price? A much more reliable way to estimate SOM (eg. for a B2B SAAS) would be to estimate relevant adopter/buyer numbers in your first market, multiply by their average spent on similar products or services.
Also, please be careful too in using the right market sizing data. If you are selling car tyres, please do not quote global car sales as your market opportunity. Please do not directly use “wages” to estimate how much companies are spending on benefits; it’s usually a % of that. The trick is figuring out the % used. Most of the time, it’s impossible to lift out numbers from financial statements to get what you want. A smart founder would figure out industry benchmarks and use that together with information from financial statements.
3. Funding needs and terms – the amount to raise should be based on working capital needs for the next 18-24 months. My recommendation would be to model different scenarios and “buffer” 20-30% of the cash needs based on the scenario that founders are most comfortable with (aka most realistic)
In exchange for the amount raised, the founders give up equity in the business (either now or in the future, if you use a SAFE/KISS/notes to raise) Even when there is no lead investor in the round, it’s important that founders state their (realistic) expectations clearly too. This helps angels to quickly decide if this is a deal they are keen on. Think of this as “the price tag” – when you are buying something, there is always a price range that you are willing to work with. Personally, I am ok with asking valuations that are 20-30% above my comfort level, but if it’s >40%, I typically would pass.
So what’s a good valuation (or valuation cap) that a founder should ask for when raising your seed/ Pre-A rounds? While there is no set formula for early-stage company valuations (since there is only negative cash flow and really minimum market validations), there are benchmarks that we used to “sense” the space. For hardware or medical businesses that need cash for tooling or heavy R&D investments, the valuation tends to be higher but of course with deeper founder equity dilutions. But for software plays, there are differences too between a high gross margin % and a low gross margin model. Founders need to research within their space to get a realistic number.
On the same point, founders should not blindly extrapolate from the US valuation to justify their own asking in Southeast Asia. One of our angel members said it well – in the US when the product is validated in one state, you probably can assume the validation work across another 15-25 states given a very similar culture and practices, but validating the product in Kuala Lumpur does not mean the same model will work in Jakarta or Bangkok or Singapore.
4. Financial spreadsheet – forward projections of at least 24-36 months. What I am looking for here is to get a sense of both sales projections and cost understanding. Some founders would include key projection numbers in the investment deck, but that’s usually not detailed enough to help us understand the founders’ insights.
For companies younger than 18months, it’s hard to do good sales projections, as the usage pattern and growth patterns are not regular. So usually we reference sales projections to gauge founders’ confidence and market insights. We spend most of our time going into the cost details and understanding the unit economics.
Typically I ask for past financials as part of my post-commitment due diligence work. The idea here is to verify the founders’ claims against actual records. Ideally, there should be audited statements, or at least proper management accounts. In addition to that, I ask for bank statements for the most recent six months too.
5. Other crucial information – A comprehensive updated capitalization chart or shareholding table. This is especially important for companies that had previously raised on SAFE or KISS. As such instruments allow the equity conversion to come 12-24 months later, some founders may not have a good sense of their real ownership.
All the information is not reviewed on its own, but always in relation to each other. For angels, after we have made the verbal commitment to invest, our “due diligence” and information review are to help us “ascertain” our decision to invest. Personally, I am just using the documentation to validate what the founders have already been sharing along the way. But I would also be observing how the founders present the information – is it organised, tidy, punctual, etc. A good strong founder is one who really knows his business and can readily share very thorough explanations to every single bit of data/patterns/thinking behind every decision.