Before investing in a startup, investors will first conduct thorough analysis and due diligence on the business. Investors approach this process differently depending on their investment motives. Financial investors like angel investors and VCs invest for financial gains whereas strategic investors like corporations invest for other strategic benefits.

We explore what goes on in an investor’s mind before he or she decides to write the cheque.

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Financial projections are an essential part of a startup’s pitch to investors. They are a feature from the initial pitch to the due diligence process as well as valuation discussions.

Achieving accuracy is not the only aim of preparing financial projections. It is the thought process involved in coming up with projections that gives a better understanding of the startup. Projections help answer the question of whether capital raising is required and the amount that needs to be raised. They also guide investors on whether the investment returns justify the entry valuation.

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With the heightened activity in the startup scene these days, the common question of how to value a startup is at the forefront again. Valuing startups poses more of a challenge as unlike conventional businesses, they do not have much of a track record to serve as a guide.

When it comes to valuing startups, it is important to understand the limits of conventional valuation methods and to make relevant adjustments adapting them to startups.

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Once a startup has devised its growth plans and strategy to scale its business, it is time to look at the financial resources needed to achieve those plans. By looking at its financial projections, the company would have an idea of whether it can fund its plans via cash from operations or if it needs external funding.

The startup will work out the amount it needs to raise and consider the type of investor it wants on board. It will also explore the different aspects of fundraising including what instrument to issue, structure of investment and the extent of influence the investor will have on the company. 

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The Term Sheet captures the main points agreed by the investor and the startup when arranging funding. It sets out the structure of the investment and how the mechanics of funding work between the parties. 

 Startups raise funds either on a priced or non-priced round of funding. A priced round of funding indicates that the parties have agreed on a fixed valuation for the business. In a non-priced round of funding, valuation has not been crystalised and will depend on the price set in a future round of funding.

Whether it is priced or non-priced rounds, the following are the important points to look out for when negotiating a Term Sheet.

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There are various options for a startup to scale its business and plan for growth. For a start, it is important to find out how effective the business is in securing new customers and how engaged the customers are with the product. This helps identify how easy or difficult it is to scale and whether the product is being used as expected.

If the startup finds that it is on the right track, it may set growth targets in terms of, for example, revenue or number of users and devise a strategy to achieve them.

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A startup exists to solve a problem or a pain point. 

Upon coming up with the idea for a startup, the founders may choose to invest time and capital immediately into developing a product to solve a pain point. 

Alternatively, they may choose to test whether this perceived pain point actually exists before spending more time and capital in the product. This is to avoid the situation where time is spent developing a product or solution that nobody wants or where demand is weak.

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Startups, especially those that are in the pre-seed or seed stages, may not be in business long enough to show meaningful financial performance. To understand more about how their business is performing, we can look at metrics relevant to that type of business.

Metrics provide further evidence of business validation, whether there is product-market fit and the degree of traction. When doing due diligence on a startup, it is important for investors to analyse the relevant metrics to gauge the performance of the business and to verify key assumptions.

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