Raising Early Stage Capital is Hard----as it Should Be!
- Apr 24, 2017
- 4 min read
The statistics do not lie. Whether the source of the information be public, directly from a principal of an angel investment group, or from private individual investors, the bottom line is consistent: Fewer than 5 percent of the “early stage deals” they see, meaning companies with very small or no revenue, and little or no previous capital investment other than “family and friends” and self-financing, receive equity or convertible note based financing.
That daunting statistic includes a fair number of ventures that simply lack fundamental qualifications that range from having a solution for which there is no market value, to solutions that would have market value if in fact they were viable solutions. And there is the all-important Team issue: Too many early stage ventures have strong technology teams, but lack the professional business credentials to successfully launch a new venture.
So even though the stories about how investors backed what became “unicorn” blockbuster deals after just one meeting with a company, they are called “unicorns” for a reason. The reality is that even if all of the key criteria bases are covered, the real world- odds of raising capital remain daunting.
And, objectively, they should be. Realistically, even with the ultimate “killer app” technology, the number and complexity of business related variables that need to be convincingly addressed can be overwhelming for the first-time entrepreneur.
However, those odds can be meaningfully reduced if an entrepreneur approaches capital raising as a Process involving both science and art, along with good connections, persistence, experienced guidance….and a sprinkling of good luck never hurts!
Tip 1: Make sure that the organization or individual whom you approach has a demonstrated “appetite” for investing in your company’s “space”, and in the amount range that you are seeking. Although some investors profess to be interested in almost anything, the reality is that the great majority will pull the trigger only if they are personally comfortable with you, your industry, and the fact that your “ask” is within the range of what they typically invest.
So it is very important to do your homework before submitting a Business Plan, requesting a meeting, etc. Word spreads quickly in the investor community about companies that “paper the walls” with badly misaligned outreach, and future access becomes virtually impossible.
Tip 2: If you do get that first meeting, approach it as a valuable learning exercise that can be capitalized on later. It is not a win/lose scenario. The reality is that even if prospective investors have sincere initial interest, there will be a series of exploratory meetings, hopefully followed by a structured due diligence process. An initial turndown by an experienced investor usually keeps the door open for a repeat visit downstream, once identified issues have been resolved and additional progress made.
However since “winning” the first time through due diligence is the primary goal, an investment in your time and effort in working with experienced veterans of the due diligence process prior to actually stepping into the ring may prove to be well worth it.
Tip 3: Make sure that your Story is about the complete Investability Case for your company, not just the technology innovation, the size and growth of the addressable market, etc. First time entrepreneurs, especially those with science backgrounds, should enlist the help of experienced business professionals who have deep insights into what the critical financial and marketplace metrics are that drive purchase decisions in the targeted market (s).
Tip 4: Be humbly realistic about your personal abilities and limitations. This is especially important for first time entrepreneurs. Launching and growing a new enterprise requires a broad cross-section of talents, many of whom can be outsourced at a much more affordable cost than full time employees. The importance and value of having at least one “battle tested” former entrepreneur with significant business experience in your targeted market actively involved (whether on an outsourced or FTE basis) cannot be overstated. Advisory Boards are very useful components of your overall company structure, but do not repeat the common mistake of many young companies of expecting AB members to be available and willing to provide the type and degree of operational support that you will need on a regular basis.
Tip 5: When seeking early investment capital, do not get hung up on valuations. If you are successful in obtaining a Term Sheet from an investor that provides the capital you need, comes with other terms that you and your Board or experienced advisors feel is reasonable, and----best of all—the source is “Smart Money” that will add valuable connections and other support----the proposed valuation issue should rank low among your decision criteria for three important reasons:
As your business grows, its intrinsic value will also increase, and the chances are high that early valuation “concessions” will be more than recouped when the company is eventually sold, merged, etc.
Early investment obtained at a high valuation often makes it much more difficult to obtaining next-round funding, short of creating a “down round” scenario. Much better to be approaching that next round previously undervalued than overvalued.
“Valuation fixation” on the part of founder teams is a major turnoff for many prospective investors. They view it as a signal that the founders are not sufficiently focused on growing the company for the future, as opposed to debating relatively (in their eyes) minor details.
As someone who has been on both the entrepreneur’s side of the table as well as the investor’s side (multiple times for both!), I strive to create Win/Win scenarios for both young companies, and well-aligned prospective investors.
There is no sure- fire formula for obtaining early stage investment, and it’s more about art than science. However, by working with young companies early on to build a strategy and action plan that proactively address investor concerns, and introducing companies to investors whose “appetites” correspond closely to a company’s most investable attributes, my experience has clearly been that the odds are substantially improved, and the company’s time and energy expended in getting to “Yes” is significantly reduced.
David Potter, SNIFE Provider, Healthcare Business Expert
https://www.snifeco.com/providers
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