A financing round refers to all measures with which start-ups or companies raise capital for their business activities. Start-ups require additional funding, particularly in the early stages of their development, as they are often still operating below the break-even point. Financing rounds help to convince external investors such as business angels (former entrepreneursor managers who can help founders achieve a breakthrough through their experience and financial strength) or venture capitalist funds to enable the company's growth.
Venture capital (VC) is a type of financing in which investors invest capital in promising start-ups without demanding collateral as with a traditional loan. In return, they receive shares in the company and become co-shareholders. However, venture capitalists do not usually acquire a majority stake, as they want to leave the founders in control of the company. In addition to financial resources, venture capitalists often contribute industry knowledge, networks and management experience to support the start-up on its path to success.
There are different types of financing rounds, each addressing different goals and phases of company growth. Start-ups usually begin with a pre-seed phase in which they develop their business model and implement initial steps such as creating a functioning concept or prototype - often without external investors, which is known as bootstrapping.
This is followed by seed financing to further develop the idea and prove its feasibility. Further financing rounds such as Series A, Series B, and in later phases Series C, Series D or even Series E focus on the expansion and growth of the company. Each type of financing has specific objectives, ranging from product development to scaling and preparing for an IPO (initial public offering).
The seed financing round is the first financing round in which a start-up raises capital from external investors. It serves to turn the business idea into reality and to provide proof of concept - i.e. to prove that the idea can work on the market. The capital is often used for market analyses, product development or initial marketing activities.
To convince investors, founders must present a strong team, a clear business plan and a convincing vision. Business angels and start-up funds are typical investors here, as they can contribute not only financial capital, but also networks and industry knowledge. This phase is crucial in order to create the basis for further financing rounds such as Series A.
The Series A financing round helps start-ups to deepen their market entry after the seed phase and expand their market presence. The aim is to turn initial users into**permanent customers**, expand the product range and lay the foundations for sustainable growth. In this phase, investors are looking for start-ups with high growth potential and convincing business models.
The Series A financing round often goes hand in hand with the establishment of strategic partnerships that support the company's growth. In contrast to Series B, which focuses more on expansion capital and the development of new markets, Series A focuses on establishing the business model.
A qualified financing round is closely linked to the conversion of convertible loans into equity. Convertible loans are a financing instrument that start-ups use at an early stage when they need capital but are not yet able to make a clear valuation of their company. Investors grant the start-up a loan that is later converted into shares as soon as a qualified financing round takes place.
This financing round makes it possible to convert existing debt into equity, thereby strengthening the company's balance sheet. At the same time, the original investors benefit from better conditions and secure shares in the company at an early stage. For the start-up, this means less debt and a clearer cap table for future investors.
The process of a financing round can be divided into phases: the preparation, the actual negotiation and the closing.
Founders need to create a solid foundation to convince external investors. This includes a business plan that describes the vision and scalability of the company, as well as a pitch deck that briefly explains who the start-up is, what problem is being solved, how much capital is required and what ROI can be expected. In addition, investors such as business angels or VCs should be approached who can contribute networks and industry knowledge as well as capital.
In this phase, founders and investors meet to concretize the investment:
A structured data room and careful preparation make this process considerably easier. Companies that organize their capital procurement efficiently can thus be successful on the market.
Whenthe management prepares a financing round, the finance department gets hectic. Investors want to see detailed figures and information: From the business plan and proof of assets to contractual obligations. And the deadlines for this are usually tight. The task now is to compile these figures, consolidate them and prepare them for presentation.
It does not matter whether it is a capital increase for a long-established company or venture capital investment for a start-up. In any case, investors want to see a detailed overview of all business-relevant facts:
The background to the enormous need for information is ultimately formed by four key questions that every investor asks himself before he invests in a company:
What is actually the problem of the finance department?
Only a small part of this information can be extracted by the finance department directly from the accounting data. Most of the data has to be requested from other departments: Human Resources, Marketing, Development, Product Management, etc. And this is where the biggest challenges for the finance department lie. The reason for this are three problems that almost every company knows:
The basic idea of reverse roadmapping can be summarised in one sentence:
"Define the goal and calculate from there back to the present".
For the finance department, which has to prepare a financing round, this means concretely:
In addition, it goes without saying that a central data room must be created and the form and scope of the required reports, presentations, fact sheets, etc. must be discussed with the management.
Start-up GmbH is planning a financing round. The management wants to announce the successful conclusion of this financing round in exactly six months.
It is known that investors still need one month to finalise the financing round after they have decided to invest, provided they have the necessary information. This includes, among other things, the signing of contracts, an appointment with the notary and the transfer of the amount of money.
In order for investors to be able to thoroughly check the available information (due diligence), it must be made available in a central data room that investors can access. And it must be complete, correctly classified, sorted and named in a comprehensible way. The due diligence process normally takes 4 weeks.
In order to motivate investors to enter into negotiations, they often first have to be convinced that a closer examination is worthwhile with so-called "teaser" presentations. Such "teasers" contain rough information on the financial model as well as data from the past, such as sales figures. They must be available at least 4 months before the planned closing.
Depending on the situation, it takes up to thirty feedback loops until the teaser presentations perfectly meet the requirements of the management. Often the data is not yet available in the required quality, which makes it necessary to consult the tax office or the legal department, for example. Sufficient time must be allowed for this as well!
Schematic representation of the reverse roadmap developed:
To ensure that the financing round goes as smoothly as possible, it is worthwhile to think carefully about the storage of the data and documents that need to be gathered and kept within reach during the process.
What requirements must the filing system fulfil in order to become an optimal "data room"?
In order to save time in setting up the data storage, online tools can be used which help to scan the documents, extract information automatically and bring order to the flood of data. One of these tools is ContractHero. Here you can find more information on contract management software.
You may also be interested in...
Everything you need to know about termination agreements - A comprehensive guide
Termination of a software contract: sample & what to consider
Freelancer contract sample: structure, differences and important details
.svg){kind=logo}
_EasiestSetup_EaseOfSetup.avif)
