Rasmus Holst, CEO at LMS365.
When it comes to fundraising success stories, we often only hear about them after the deal is sealed and the capital secured. What people rarely talk about is the nerve-wracking process that CEOs and executive teams undergo to negotiate, manage curveballs and represent their organization and employees’ best interest.
According to Crunchbase data, 2021 set a record high in startup investments, but funding in North America declined significantly in late 2022 amid rampant fears of a recession. Many predict that the next two years will redefine startups and venture capital, bringing a brighter economic future—especially if we take a back-to-basics approach to the process.
I have witnessed and experienced firsthand the rollercoaster ride involved in closing a funding round. Here, I’d like to share an unpolished version of the success story—one where the due diligence process takes center stage in order to showcase the factors that can challenge even the most experienced leader.
Thinking Beyond The Term Sheet
So, what do you do when a term sheet arrives from investors? Do you announce to your organization that you’ve secured funding and everyone can finally breathe easy?
The reality is that even with a signed term sheet, there is still a risk that the deal might fall through. A term sheet is not an investment agreement—something most people don’t realize until they go through the process themselves.
It is crucial to strike a delicate balance between providing transparency to your team and managing the uncertainties that still lie ahead in the fundraising process. In the case of my company, I decided to tell my team that the term sheet was signed but also explain that this wasn’t the final event of the fundraising process.
Balancing Transparency With Prudence
As a CEO, you must consider the potential consequences of sharing the ongoing fundraising process with your team. While you want to maintain an open and honest culture, prematurely revealing the uncertainties and challenges faced during due diligence can create unnecessary anxiety and instability.
It is important to provide updates on the progress without overwhelming your team with every twist and turn along the way. Every time there was a significant step forward, I decided to share the positive news with my team.
Trusting The Process
At this stage, the executive team is likely biting their nails. However, you must have confidence that the due diligence process will unfold smoothly with all the necessary checks and balances.
This phase involves intense scrutiny of every aspect of your business, from financials and legal matters to operations and market viability. It requires honesty and a willingness to address any potential weaknesses or concerns that may arise. The more mature your startup or scaleup is, the more intense the due diligence process will be.
Closing a funding round involves much more than signing an investment agreement, and I’ve found that the due diligence process can be equally (if not more) challenging than initially setting up the deal.
As a CEO, you will face the dilemma of transparency versus uncertainty when it comes to your team—all while still having to run the business operations as usual. My experience is that by keeping your team informed, albeit judiciously, you can maintain a greater sense of stability for yourself and them during an otherwise stressful phase.
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