The difficult road to success – stages of attracting investment in a startup

In the world of business, as if in an exciting game, each company is a separate level, each stage of development is a separate test. This is especially true for startups, whose fate depends on the attention of investors. Today we’ll talk about how to structure the attraction of investments in a company depending on the stage of development at which it is located.

I analyzed this path, starting from the formation of the enterprise and ending with the moment of its IPO.

Let's imagine that you are the head of a startup who has never encountered attracting investments. Where to begin?

Here are the main steps:

1. Collection and systematization of information about the company and its product. At this stage, you should collect important data about your startup, from how it was founded to what products or services you offer. It is important to have a clear idea of ​​what you are doing and what your goals are.

2. Researching potential investors focused on a specific business area. To do this, you will have to research the market, perhaps communicate with competitors.

3. Preparation of information materials and presentation of the project in the form of a presentation. Create a compelling visual that convincingly demonstrates the potential of your business. It is important to attract investors' attention at first sight.

4. Conducting first meetings with investors and presenting the project idea. Prepare for possible questions, be ready for dialogue and discussion.

5. Establishing and developing relationships with potential investors. This is a process that requires patience, strategic thinking and professionalism.

6. Developing the basic terms of the transaction and concluding an agreement, receiving proposals for official investment. Discuss the terms of the investment with the investor: amount, share in the company, expected income. Close the deal and receive a formal financing offer.

7. Preparation for conducting a company audit (Due Diligence (DD)). Before your company is dismantled by investors, I advise you to contact a professional lawyer who will analyze financial statements, legal documentation, and operational processes in advance. This way you will have time to correct mistakes and meet Due Diligence, so to speak, fully armed.

8. Completing a funding round and receiving investments. You did it! Now you have the means to grow and develop your startup.

Of course, these stages are not an axiom, but a postulate. They may change depending on what stage of development the company is at. This also affects the choice of method for estimating its value. Some features of a startup appear and disappear during a certain period of development.

To make it clearer, I have compiled a list of stages, depending on which the form of financing the company will change.

Pre-sowing stage – the first real stage of startup capitalization. At this stage there is very little hard data or hard financial data to justify the investment. Therefore, potential investors focus on two main characteristics: idea strength and team. If your startup is in the pre-seed stage, the main thing for you is to sell the idea.

Seed financing – the first official round of financing. Entrepreneurs use the funds to test the market, develop products, and speed up operations. The seed stage is usually about building the foundations of a new company – ideally based on the company having an MVP and demonstrating at least some customer support. An important source of seed funding is accelerators, business angels and specialized venture funds.

Serie A” (Series A). If you've made it to this stage, congratulations! Here you will already be given a much larger amount of funding, but be prepared to prove that you already have a minimum viable product (MVP) and not just a great idea or team. Investors are starting to look at real data to see what the startup has to show for the money they previously invested. The series is named after the type of shares that participating investors will receive—Series A Preferred. This is usually the first round for preferred stock. Along with preferred shares, a convertible loan is also used.

Series B. “Not only everyone” gets to this stage, that is, companies that are already starting to make a profit and are striving to scale their existing funds. Such enterprises may focus on international expansion or expanding the range of related products.

The Series B round may include investor profiles such as VC funds, PE funds, family offices, hedge funds, and corporate venture arms.

The financial instruments used are common stock, preferred stock (usually Series B preferred stock), convertible debt, mezzanine debt, and classic debt.

Series C This round is usually aimed at making the startup attractive for sale to a strategic investor or supporting an IPO. Here, investors are already working on a more detailed plan for exiting the investment, and capital is often raised for strategic acquisitions. It is sometimes used to lure talented key employees, eliminate competition, increase the number of users and geographical coverage.

OTC Bond Stage

The over-the-counter bond market is an important tool for companies that are planning to attract investment, but are unwilling or unable to list their bonds on official exchanges. One of the key features of placing securities on the over-the-counter market is the absence of strict criteria for revenue and disclosure of financial information, which is especially important for small startup businesses.

In the over-the-counter market, companies can sell bonds directly to investors, without the intermediation of exchange dealers. This approach allows issuers and investors to negotiate freely, remain anonymous and automatically register transactions with the central depository.

The Russian over-the-counter bond market is represented by the MOEX Board and RTS Board systems – there you can post announcements of transactions, create lists of counterparties, as well as conduct transactions and register them.

For startup companies, participation in the over-the-counter bond market has a number of advantages: attracting financing without going through complex procedures required on official exchanges, flexibility in setting placement conditions, a simpler procedure for registering transactions, and reduced commission costs.

Not every company reaches the IPO stage (initial public offering of a company's shares on the stock market). But as soon as a startup acquires public status, enormous opportunities for raising capital open up before it, like a door to Narnia. By publicly selling shares, the company's valuation becomes more transparent. Investors can monetize their stake by selling shares in the market.

In 2023, the following technology companies launched IPOs:

• Astra Group (Astra Linux) – technology, telecommunications and media. We created an IT product that became a successful alternative to the Windows operating system. Investors valued the company at RUB 69.9 billion.

• Softline (DPO) – technology, telecommunications and media. Since 1993, we have been able to become a leading supplier of IT solutions in Russia. Investment estimate – 138.5 billion rubles.

• SmartTechGroup / CarMoney (DPO) – Financial services. The company specializes in issuing loans secured by a car, but according to a unique scheme: the car remains in the ownership and use of the owner. CarMoney brought shares to the market through a direct listing procedure (this is not an IPO, but a DPO) – worth more than 600 million rubles. Demand for shares eventually exceeded supply.

• Genetico – biotechnology and biomedical research, medical services. One of the largest players in the genetic research market with its own medical genetic center and four laboratories. Genetico's IPO placement caused a stir among investors – the company's market capitalization on the day of placement amounted to 1.48 billion rubles.

But such success is achieved not by chance, but by systematic preparation. Attracting investment is a complex and multifaceted process that requires a careful and competent approach. Each company is unique and goes through its own development path, so it is important to adapt the strategy to the specific characteristics and goals of the business.

Remember that the road will be mastered by those who walk. Therefore, we put fears on the top shelf, gain self-confidence, do not hesitate to seek the help of a lawyer and boldly take your business into a new orbit!

Good luck!

Ksenia Gain

practicing trial lawyer and managing partner of the law firm GAIN AND PARTNERS. In his telegram channel I share news, interesting cases and analyze the latest legislation in the field of IT