Later stage investment is increasing – but rounds are taking longer to close

New data published in a report by equity management firm, Carta, has revealed that while the amount that Series B companies are raising is increasing, it’s taking much longer for these deals to close than it has done in previous years.

The report states that later-stage deals are taking longer to close – according to Carta’s report, compared to H1 of 2022, it took a median time of 85% longer for startups to raise a Series B round after closing the Series A, the biggest jump in timeline across all round sizes.

The wait for seed funding has grown significantly. Pre-seed startups now take a median of 511 days to raise their seed round, a nearly 50% increase compared to the first half of the year.

Below, Corporate Partner, Jas Bhogal sets out the various aspects that could affect the speed of your funding round and the measures you can put in place to make for an efficient funding process.

Make sure your legal fundamentals are robust

Ensuring your legal documents are compliant and in good order is paramount if you want to reassure your investors that this is a serious investment opportunity. If your business is not protected legally, this may steer investors away from wanting to inject substantial amounts of money into your business.

Make sure you are covered in all areas of the law by considering:

Protecting your ideas

This includes registering trademarks, patents, and other intellectual property.

Setting ground rules

Draft and maintain key documents like articles of association and shareholder agreements, which define shareholder rights and procedures.

Securing business deals

Negotiate and finalise major contracts that are crucial for your business operations.

Managing your workforce

Establish clear employment contracts and policies to ensure a healthy work environment.

Remaining compliant

Maintaining accurate and up-to-date filings with Companies House, the governing agency overseeing businesses.

Managing risks

Be sure to obtain adequate insurance coverage to protect your business from potential liabilities.

Data privacy compliance

Ensure other registrations such as data protection are in place.

Many investors tend to conduct legal due diligence – this involves reviewing crucial business documents like insurance, trademarks, contracts, and company/employee information.  Building a secure data room allows you to efficiently present this information in one central location, streamlining the process for both you and the investor.

The financial aspects of your business must be clear

Another aspect prioritised by investors is financials. By preparing clear, well-presented financials beforehand, you can save time and stop the slowing down of the investment process. While pitches and plans are important, determining your business valuation is crucial before negotiating with investors. Understanding your worth empowers you to make informed decisions.

Investors will be interested in your tax situation, particularly tax relief opportunities like SEIS or EIS schemes, which may require adjustments to investment documents and share structures.

Key financial documents include:

• Cap table: This breakdown of share ownership percentages is vital for investors. An accurate and visually appealing cap table allows for quick comprehension of shareholder rights and voting power.
• Cash flow forecast: Demonstrate the flow of money in and out of your business. Highlight investments in growth areas, a key point for investors. Multiple forecast scenarios show you've considered different financial possibilities.

By preparing these documents effectively, you'll present a strong financial case to potential investors.

Jas Bhogal says:

Preparation is key. Taking time to ensure that your existing share structure, shareholder rights and legal documents are correct and up to date before the new round is launched will greatly assist with the efficiency to close the new funding round.

Our article on how to thoroughly prepare for a funding round will give you the full extent of all of the tools you’ll need going into the funding and investment process. If you’d like to speak to a corporate lawyer about navigating an upcoming funding round, please contact us using the form below.