As mentioned yesterday, Marko Wenthin is contributing this week on how to become a FinTech unicorn. In Part One, he talked about fund raising. In part two, he focuses upon the challenges that then follow.
How to be a Unicorn (Part Two)
If you manage to get some investors interested the next challenges appear.
The level of details you have to provide in the shortlist stage can get overwhelming. And very often VC translate your numbers into their own templates and you have to spend even more time to explain numbers, go-to-market-strategies, product details and so on to VC team members, mostly associates. No offence intended. And you repeat the same thing over and over again and key people get drawn into those talks. Having less time to actually do their jobs. This stage can drag on to a felt eternity and the time you are losing to execute on your plans becomes frightening. Especially, as in your original numbers you would rather tend to be optimistic and have already factored in the funding. The funding however is still a long time away, but time passes and as such the time to execute on the plans. As you would talk to all your shortlist candidates without exclusivity to give you the options to choose ultimately, the effort put into such stage is enormous and again obviously not fully appreciated by the VC as they only see the time you spend with them.
When the first ones want to move ahead and are prepared to issue a term sheet it often comes with the condition of exclusivity and of course subject to a due diligence. Now the entrepreneur has to decide to go exclusively with one or some VC with the benefit of reducing the time with different VC but at the same time with the danger of reducing the options. And lets face it investors know very well that now after weeks if not months of the process you have been worn out and are reaching the end of the runway. Time is working in their favour. This is the time where things really can go pear-shaped if the options have been reduced too much at the beginning of this stage.
The process is moving ahead with no time to moan. The due diligence is what comes after the term sheet and to be honest very often has already taken place in the stages before, only it was not called it that way. Since by now there should not be any hidden secrets anymore as everything part of a dd should have been in the dataroom anyway. So it’s time to bring in the big guns and have the team present in their words and in interviews what the entrepreneur and C-Level have been pitching before. You better have your ducks lined up and the team properly briefed, because if in the dd things come up differently to what was stated before your are in trouble. And it is not that the team is to lie or anything. But let’s face it, engineers, product owners or legal people have different views how to communicate what they are doing day in day out and have to cope with. They might be too critical to what the company is doing and the readiness of the product. That’s their job to be critical in order to move things forward in the company. Whilst this is part of internal management it can go down very wrong indeed if too unreflected stated to an investor. Here again, the VC only sees and appreciates the time and effort you are spending with their firm and does not take into account that the whole dog and pony show is being repeated with their peers.
After the due diligence has successfully finished the final negotiations with the investors take place and time. Often the contracts have been already on the table during that phase. As you can imagine if there is more than one investor the contract negotiations are multifaceted and one has to try to keep ones best position vis á vis the investors. Not an easy part indeed and again very tiresome and often quite lengthy, especially now that lawyers join the table.
All that being stated you can already see that a funding process is not just a very time consuming issue but most and foremost an immense psychological pressure on the entrepreneur and his management team due to its fragility on both the funding process itself and the management of the company. Three to nine months is quite a fair assumption to be planned and catered for. In all that time the markets, the customers, the products and the competitors were not standing still. Especially, in any digital business this can feel like years in traditional terms. As a general rule the time and effort is largely underestimated by the fund seeking companies and only when all is said and done, i.e. the ink has dried on the contracts the focus of the management will be back to the company. And this is the point when most realise that the funding process had a bigger impact on the company than one wanted to admit. Inevitably plans have to be reviewed. More often than not the originally expected positive developments are consequently to be moved by a number of months further down the road.
I don’t want to justify that plans will move. I just want to point out that this is likely to happen and has in most cases nothing to do with the company or the product market fit or the market. Spending time with multiple investors in a young and growing company over a long period of time is simultaneously not spending that time with the team and the customers and therefore claims its toll. The more diligent (if only perceived as diligent), slow and interfering investors act the larger the impact will be.
- Think about external capital as early as possible
- Investors invest in people capable of execution, not ideas
- Plan for contingencies, extra time and if possible extra ressources, don´t spread yourself to thin
- At the beginning talk to as many investors as possible to find out who fits to your company
- Force clear deadlines and communicate this expectation
- Don´t reduce your options too early, for the price of extra time spent with more investors
- Prepare a diligent dataroom, keep it up to date and provide the answers there for all investors to see – that saves time in meetings
- Keep your team posted on the progress, make sure they don´t dispair and be wary of the grapevine
- Bring your team in line before having them talk to investors, be present to correct the course of conversations if needed
- Keep positive, once you got it over with, the pressure will wear of soon
- After the round is before the round, make full reviews of the previous round and enhance the process. Eventually, the rounds become bigger with less effort spent
Marko Wenthin, 45, married, one daughter, lives in the outskirts of Berlin
Marko started his career with an apprenticeship in Deutsche Bank. There he spent 16 years in many diferent positions in retail, corporate and investment banking. Out of his 16 years he spent 10 abroad, in Argentina and in Poland. In Poland he became youngest Board member of a bank in Poland at the age of 30 and acted as COO overseeing IT, operations, back and middleoffices. In his mid 30s he changed the corporate career for entrepreneurship. He founded a couple of SaaS businesses and even a helicopter airline which due to the financial crisis of 2008 had to be shelved briefly before starting operations. He helped Asseco, one of the largest IT software companies in Poland to expand in Western Europe and acted as non exec Board member in a couple of the acquired companies. In 2009 he created Sofort Bank, sister company of SofortÜberweisung, which later on was sold to Klarna. Sofort Bank became Deutsche Handelsbank. In order to bring banking to the next level he co-founded solarisBank and defined Banking as a platform in the real world. He is a regular speaker at FinTech events.