8 basic tools startup founders need when preparing for a unicorn round
In the tech startup world, unicorns are private companies or startups valued at over $1 billion. According to CB Insights, there were 483 unicorns as of July 2020—a 258% increase from the 187 that existed last year. Nearly half of those successful startups are in the United States, based primarily in Silicon Valley. But these young innovators didn’t achieve their success by sitting back and hoping for the best. After all, reaching unicorn status is no small feat. The process of startup fundraising requires discipline, strategy, and serious preparation. As a fintech unicorn, Brex has been through it all. And we’ve got some simple tools that, when used deliberately, will help make your small business shine in investors’ eyes.
The fundraising lifecycle of a startup
Before reaching the public markets, tech companies must prove their worth to the masses. Modern behemoths like Uber, Amazon, PayPal, LinkedIn, Lyft, Salesforce, Snapchat, and Airbnb all started from scratch before dominating their respective industries. From bootstrapping to IPO, every startup goes through the same process of raising capital. Before fundraising, most startups operate on pre-seed money. This small investment—typically from crowdsourcing, credit cards, personal savings, or friends and family—is the basic capital required to get the business up and running. Sometimes these early investors receive a stake in the company in exchange for their investment.
Following pre-seed funding, the primary source of startup capital comes from seed rounds. The primary purpose of seed funding is usually research and product development. During these first rounds, it’s important to clearly define deliverables, milestones, and any interest on the investment. Seed accelerators and incubators such as Y-Combinator, Techstars, and 500 Startups are alternative funding options. These entities invest in a startup’s development potential.
As a startup scales and needs more funding, many founders turn to the private market for support. One of the most leveraged private equity sources is the angel investor—an individual with a net worth of at least $1 million, and a minimum annual income. Unlike venture capital firms, angel investors use their own money to back early stage companies. Some angel investors contribute individually, while others contribute jointly with a group. Startups raising money at this stage have proven business models, making them more attractive to angel investors. But a solid pitch is still necessary to convince these benefactors that their investment will be worth it.
Venture capitalists (VCs) can also inject necessary funds into a fledgling technology company. From series A through E, venture capital firms like Kleiner Perkins, Accel, Andreessen, Benchmark, and Sequoia provide growing levels of capital to startups as they scale and prove their ROI. Series A funding typically refers to a class of preferred stock sold to investors in exchange for their monetary investment. But venture capitalists offer more than just capital. Many sit on their investments’ boards, providing valuable insights and resources as the company grows. Unlike angel investors, VCs are investing other people's money. Their job, then, is to invest in businesses that are likely to yield a high ROI for their clients. This makes preparation a critical part of pitching for young startups.
Using basic tools to prepare for your next round
Whether starting out or aiming for unicorn status, fundraising is a nerve wracking process that can leave founders feeling lost. Fortunately, we have experience raising rounds and securing that unicorn status. We’ve assembled a list of core—and often overlooked—tools every founder should have in their arsenal when preparing for that next round:
- Microsoft Excel, Google Sheets - Using this basic spreadsheet program, you can build a robust financial model for fundraising presentations. Potential investors will expect a 2-5 year financial forecast of your company, as well as unit economics, in a digestible format. Given the enhanced functionality, better shortcuts, and the fact that most investors prefer Excel, we tend to recommend Excel over Google Sheets.
- PowerPoint, Google Slides - Investors expect a memorable presentation highlighting the company, market opportunity, and fit. Make your words count, and create a polished, professional presentation that contains no more than 12 slides.
- DocSend - Manage file sharing securely, and control who has access to critical documents. DocSend’s tracking feature has been helpful to Brex founders in the past, and we want to pass this service along to our customers. With three free months as part of Brex Rewards, founders can capitalize upon this simple yet useful service.
- Dropbox, Google Drive, Box - Private file sharing is a critical component of any startup founder’s business repertoire. Founders need to have a private folder—sometimes called a Data Room—which is shared only with those included in the fundraising process. The smaller the audience the better, until details like timing and valuation are finalized.
- Clerky - Whether you like it or not, today's investing world often requires interaction with a law firm or two. Since investors will be using legal services, it is best to have a law firm to negotiate the smaller deal points and other minutia on your behalf. In a non-traditional or crowdsourced round, you may be able to use online legal software such as Clerky to create documents. Being familiar with these SaaS programs in advance can help ease some of the tension that inevitably comes with legal dealings.
- Microsoft Word, Google Docs - The standard for legal documents used during fundraising, you’ll want to be very familiar with the formatting options, benefits, and limitations of whichever program you choose.
- Adobe Acrobat - It is generally considered standard form to send documents in PDF format to avoid recipients or uninvolved parties making edits. Editing software makes it easier to add your signature to important paperwork, and being familiar with the process of doing so will help you when you get to that point.
- Wire transfer instructions - Once you’ve secured funding, investors will need to know where to send the money. Make this as easy as possible. Prepare detailed wire transfer instructions beforehand, including routing and accounting numbers. A nice touch is to present this document in PDF format with your company letterhead.
These tools may seem obvious on the surface, but many startup founders get so tied up in hyper growth that they forget to stop and prepare the basics. Regardless of which round you’re raising, doing so will help you as you navigate the stressful world of fundraising.
Unicorns are worth $1 billion, but preparation is priceless
Before fantasizing about your IPO announcement in the New York Times, Forbes, or Fortune, focus on your Crunchbase profile instead. What do those real-time numbers tell potential investors about where your business will be in the next year? Four years? Ten years? Are you and your co-founders aligned on your company’s aspirations? And are you prepared to speak to those goals?
From the Bay Area of San Francisco to New York City’s Wall Street, every startup founder makes certain trade-offs when pitching to investors for the first time. But one thing you should never compromise on is preparation. Prioritize and polish the basics, and you will move through your fundraising with confidence and ease. Coupled with thorough preparation, the right enterprise software will save you time, money, and stress as your propel your company forward. And after you’ve raised that round and reached the coveted unicorn status, you will be happy to have made the choice to invest in your own success.