What to Expect, When You're Expecting (a financing)

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Maybe your capital needs are expanding beyond the ability of your existing capital sources.  Or maybe you see a special opportunity that can only be pursued with an influx of cash.  Maybe you're ready to take your business to the next level.  No matter the circumstances that have brought you to this post, you're wondering -- Am I ready to do a financing?

The decision to pursue a financing for your small business brings on a process which at times can be daunting, exhausting, tumultous and potentially -- uplifting.  The process itself can seem a little unnatural and it always prompts questions.  So if you're expecting some financing, here's some questions about what you can expect....:

What are the steps in the process?

Step one: Conceptualize your pitch and refine your investment thesis.  Step two: Carefully research potential partners and approach them  via introduction by a third party.  (Hint:The third party must be known and trusted by the target investor partner. ) Step three:  Close the deal by generating multiple interested parties and negotiating the best combination of terms AND partner. 

My friends who have had a financing warn me about S.C.D.C fatigue; what is this?

Yes, of course, Same Circus Different Clowns fatigue is quite common during the financing process.  This syndrome arises when you pitch many different investment groups with the similar investment thesis in quick succession.  The investment groups begin to blend together in your mind.  They may, and often do, raise many of the same issues related to your financing. Each potential partner will also likely offer a unique piece of advice that is contradictary to what the others raised.  And while it might be easy to zero in on the unique, contradicatory advice  --This is the curse of SCDC fatigue. It is better to act on the common advice that you're hearing through this process.   While the fatigue will fade, the experience will remain with you for a long time.

I feel so warm most of the time, and I sweat a lot.  Is this normal?

The sale of part of your business and the involvement of outsiders is sure to prompt some uneasiness.  It is normal to be uncomfortable.  It may pass with time.  However, with the wrong investor partners or barely passable results, it may not. 

How will this affect my business?

Well, while youre' expecting a financing you'll lose some focus on your core business tasks and revenue slippage is common.  Soon after you start the financing process, your business problems will become larger or more numerous, but this is a natural result as your focus is distracted away from daily business operations and becomes fixated on the financing.  Amongst previously funded CEO's this is jokingly referred to as the "problem fairy".  Not to worry, however,  as your problems will go back to normal after the financing.  

Are there any other physical changes?

Some CEO's who raise funds experience "Balance Sheet Hearing Loss" which is an inability to hear your investors' concerns when the balance sheet is flush with cash after the funding.  This will likely be only temporary as cash will reasonably drop over time and then your hearing returns.  Many report that a bad quarter or two restores full hearing almost immediately.  Your CFO will not likely suffer from Balance Sheet Hearing Loss and should be relied upon to help you here.  Remember you guys are a team.

I have heard that you can lose a deal after signing a term sheet, is that likely?

Unfortunately you can lose a deal at any point in the process and many firms will sign a term sheet with you when they haven't completed appreciable diligence.  You need to stay focused and keep driving your company and deal forward.  It can be compared to landing a jet on an aircraft carrier -- don't let off the throttle until after the tailhook has caught the cable.  No deal is done until its done.

I am worried that my new investor directors will want to meddle in my business after the financing, how do I keep them from undermining me?

Well,  like so many other things, this is about communication and boundaries.  Be sure to communicate a lot and be clear about what assistance you would welcome on a regular basis.  Best to be understanding of first time investors or those with few other investments, as they'll be hyper-focused on your progress and seek as much involvement as possible. 

My friends who've financed have told me about post deal depression? I think the acronym was P.P.D?

Yes, Partcipating Preferred Depression isn't uncommon after the close of a financing deal.  Because Participating Preferred stock is common in most small company financing deals, this condition is also fairly common after a financing.  

Participating Preferred stock means that investors receive their investment back prior to any other proceed distribution and then -- additonally -- the investors  participate in the distribution of remaining proceeds at their  ownership level (i.e. 20%) .  You may struggle with a perceived inequity here or wonder if you'll get your fair share of a company sale.  Talk to your lawyer along the way and especially if you're struggling with P.P.D., as he or she will remind you of supporting market conditions and the necessity of honoring signed agreements.

Will things ever be the same afterwards?

No.

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