There is so much to say about how to raise money, how to find investors, what is the right fundraising strategy for your business, how much to raise and at what valuation. Fundraising is hard. As someone who’s observed the process hundreds of times and on both sides of the table (entrepreneur and investor) — here are some of the things I wish I knew about building a startup and raising funding when I was first getting started.
Finding funding is a full-time job with no guarantee of success, and it’s even harder when all you have is an idea. A desire to raise money early often signals a lack of skills, resourcefulness and commitment. The best founders I’ve seen have hustled hard to show progress – from sketching mockups, to building a prototype, to testing their hypotheses with early customer data, to creating detailed product plans.
So if you’re at the invention stage, simplify your idea and get creative. Can you serve customers manually initially instead of spending thousands of dollars building a mobile app? You’d be surprised how creative you can get when you take the possibility of money off the table. Constraints breed resourcefulness, and resourcefulness gets the attention of investors.
Bottom line: investors listen to hundreds of pitches every year and they know that the magic is in the execution, not the idea. So the general rule should be “show, don’t tell”.
Even if you’re not fundraising, you should still develop relationships with potential investors. The idea of an entrepreneur walking into a meeting with a great pitch deck and walking out with a check is a myth. When someone first meets you, you’re a dot to them. As they get to know you, those dots become lines and patterns that reveal your strengths and character. Fundraising is never a discrete exercise but rather an ongoing set of conversations around vision, operating plans, go-to market strategy and product positioning that shed light on the strength and audacity of a founding team.
I’m still surprised at how many pitch decks I receive from companies that should never raise venture capital. VC has become the default, sexy option for startups seeking funding and the implications of this are often misunderstood.
The VC model makes it unprofitable to invest in businesses that don’t have a real chance of becoming $100m+ business in a short span of time. You might be very happy owning 50% of a $10m business, but your VC won’t.
Bottom line: Raising venture capital completely changes the expectations of your business, often in ways that don’t align with your personal life goals. So do a rain check and figure out if VC is right for you.
The good news is there are plenty of alternative funding options. You can raise from friends and family, you can raise from angel investors, you can take out a bank loan, you can use crowdfunding sites like Kickstarter or Indiegogo or equity crowdfunding sites like Funders Club, you can join an accelerator (like Techstars, Y-Combinator or 500 Startups), you can apply for grants, or you can fund your business with pre-orders from customers.
Most entrepreneurs start with an idea and end up in completely unexpected places. Uber started as a black car service and only later did they see the opportunity in P2P driving. Facebook was just about college campuses. Google was just about a search button. Ralph Lauren was just about a tie. The stories about the singular and simple products that started great companies crowd out the stories of companies that started with multiple products.
My general advice to entrepreneurs is to raise a small round of capital from friends, family, or angels, use that to build and launch a simple product, and then assess the situation. If, after launch, you believe this can be a really big business, then you can start to seriously contemplate the VC path. If you think you can build a smaller yet profitable business, you can consider angels, bank loans, or even bootstrapping. You may also just change course and lose conviction on the initial proposition. The point is – if you minimize how much capital you take early on, you keep your options open and are able to make better decisions later on.
Disorganized, prolonged fundraising is exhausting, distracting, and harmful for your company and your personal brand, so once you’re in fundraising mode, do your homework and get it done.
Preparing your fundraising strategy requires identifying the right investors, determining how to get access to them, creating your pitch materials, building a simple and compelling story, setting up meetings, and creating a sense of urgency. The nerdier you get about fundraising and the more prepared and disciplined you are, the higher the chance you will be able to get it done faster.
Before I started investing in startups, I had this image in my head of investors as heroic figures with above average intelligence that could somehow predict breakout successes. The truth is, most VCs fail to provide good returns and they are humans not immune to FOMO and herd mentality. Fundraising is all about psychology.
The phrase “Ask for money, get advice. Ask for advice, get money twice” could not be more true for startups. When you need to raise cash, you look bad to a potential investor. So make sure you appear to be in a comfortable position and that you can take cash because you want to, not because you need to.
There is no shortage of advice on fundraising for startups and every investor views the world differently, which is why my advice is far from definitive. But at the end of the day, the secret to successfully raising money is to have a good company. The startup community tends to celebrate funding rounds as if that in itself makes a great business, but remember – the real work begins after you close your round.