Funding: wrap up and conclusions, post #8 of “Startup Briefs”

Target bullseyeRemember that funding being like painting a room. The fact is, painting is the last step – after sanding, repairing holes, sanding again, primer, etc. This analogy is applicable to funding for first-time entrepreneurs because you have to do a lot to be ready of prep before you can successfully raise funds. As outlined in the previous “Startup Brief” funding posts, here are some key considerations:

  • From post #4. Investors look to you to de-risk the investment. Understand the four buckets of risk that investors evaluate: People, Money, Market, and Product/Technology. Spend enough time and effort looking into the mirror of yourself, your team and your startup to know your key areas of risk and then DO SOMETHING ABOUT THEM. If you don’t, you will likely hear comments like, “You’re too early,” or “Come back when you’ve validated your market”, or “I like what you are doing, but let’s see where you are in a few months.” These comments all mean that you have not de-risked the investment enough. The investors’ expectation is that de-risking is your job.
  • From post #5. What investing mechanism is most appropriate for you right now? Have you bootstrapped until you cannot anymore? Can you show that you have skin in the game? Have you leveraged federal grants? What about TBEDs (technology-based economic development organizations)? Are you ready for angels? If you are on the hunt for VC money beware because you definitely have to have introductions and know what you are doing. If you think you could be ripe for corporate venture capital, then which firms are targets and why? Does an investment or relationship with you make sense from their side of the bed?
  • From post #6. Learn investment lexicon – know the terminology. Understand the key terms in a term sheet. You’ll need an adept, experienced lawyer to help you, but make sure that you don’t leave it all to them. That will be expensive and you will miss the educational aspects of learning investment essentials. Which you need not only for one funding round but for all entrepreneurial time.
  • From post #7. Know what structure you are going after and why. Are you confident that this should be an equity round? Convertible debt? Are you using newer structures, such as Y Combinator’s SAFE agreement? No matter which, understand how dilution will affect your investors and you moving forward. Have a comprehensive capitalization table that you use to understand various scenarios. Be ready to share that with potential investors.

drawing conclusionsConcluding thoughts about funding.

Bear in mind that raising money is close to a full-time job for the CEO and maybe another person on your small team. This means that while you are engaged in talking to investors and trying to get their money into your company you will not be spending time advancing your business. This is one of the conundrums of funding – you need it, but to get it you have to de-risk; to de-risk you have to advance your business; to do that you need all of your time and focus…

If you think of a success ratio of 1 to 10, that means to get one check you likely have to talk to 10 potential investors. If each investor is an angel, writing you a check for $25K, and you need $350K (or 14 investors), then you need to talk to 140 investors. Maybe that be short-cut by investors writing checks for $50K or more, but you get the point. You are not going to be successful with each potential investor so volume counts. This bodes true for VC dollars as well.

In addition to spending time identifying and talking to potential investors, you will be spending a lot of time with your advisors: literally your advisors, your board, and your professional services folks, most notably your lawyer. And he/she will charge you (usually by the hour). Not only will you spend lots of time, but you will spend money – money that you don’t have (which is why you are raising funds in the first place). This is another conundrum of funding: it takes money to raise money.

A third (and not final) conundrum of funding is that at the earliest stages (eg, your seed round) you may not be successful (because your deal is too risky, you are too inexperienced – meaning you didn’t do your prep work but started right out to paint the room – or you can’t find investors, among other reasons). I like to counsel an entrepreneur to not start raising money unless they know that they can be successful. Which means that they have lined up the prospects. If you are relying on friends and family (the triple Fs: friends, family and fools), and/or angels, then they are unlikely to invest unless they know you. If they are a stranger, why would they invest? It has to be a good deal for them. VCs never invest on a cold call.

So, plumb your own network first. I often put it this way to an entrepreneur who wants to raise money for the first time: “Start with who you know. Get a list of people you know who might be potential investors. Talk to them first and find out if they are interested and willing to make referrals. If yes, great. If not, go back to the drawing board and wait until you are sure you can succeed.”

A couple of additional pointers include the importance of networking and presenting. I will cover these in the next posts.

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