Raising capital for a startup or small business is without question one of the most challenging aspects of growing a business. The stories are manifold of entrepreneurs and small business owners becoming both frustrated and discouraged by the amount of time it takes to secure capital, the rejections they endure, and the lack of linearity and progress checkpoints over the course of the fundraising process. Complaints we hear repeatedly from entrepreneurs regarding fund raising include the following:
- The Stress and Frustration of “Maybe.” It is common for a prospective investor – either an individual investor or a venture firm – to show enthusiasm for an opportunity upon initial review and then to leave the entrepreneur in limbo – forwarding neither a definitive “no” nor a definitive “yes” to the investment proposition.Here the golden rule is in effect – namely those that have the gold make the rules. While investors expect you as the entrepreneur to provide a very specific timeline in regards to growth metrics and return on their prospective investment, this expectation is too often not reciprocated in regards to an investment decision.
- Lack of Urgency. A great challenge in raising capital for a private company is the lack of natural urgency. Because there are so many more sellers of private company stock than buyers, attempts by the seller to create urgency by setting time periods within which the investment must be consummated and/or limiting the amount of stock that can be purchased are often viewed by buyers as simply sales techniques and are not credible. The mindset among investors is often if it is an attractive opportunity today then it will still be an attractive deal next month. This is especially true for emerging company investments, for which the most likely exit is via a sale of the business or a public offering, events most likely to occur 3-5 years or more in the future.
So how can an entrepreneur level the playing field, mitigate the balance of power and accelerate the fundraising process? Here are three quick ideas, gleaned from Growthink’s nine years of fundraising experience.
- Have a Realistic Time Frame. In our experience, most entrepreneurs vastly underestimate the amount of time required to raise capital, as well as the number of rejections they are likely to receive. We offer our clients the 90-day rule: be prepared to spend a minimum of 90 days of virtual full-time effort on the process. At the end of this 90-day period, reassess. You will have either raised capital during this time, have a number of promising prospects, or have received feedback regarding the investment proposition such that you should be able to place a probability/likelihood of success if you continue your efforts. If you decide to continue, do so for another 90 days. Most importantly, once committed to the process, do not waiver or get side-tracked by strategic re-analysis. In the end, capital-raising is greatly a numbers game – most prospective investors will pass on your deal, but it only requires one prospective investor to say yes to be successful.
- Consider Bridge Financing Structures. Especially when raising larger sums of money (more than $500,000), think about creating convertible bridge financing structures such that the investor that comes in now receives their position at both a discount to the to-be-determined financing round valuation and/or receives some pre-determined rate of return once the larger investment is secured. Convertible financing structures such as these help on two fronts: they create an incentive for investors to act now versus waiting and they usually can close in shorter time frames.
- Be Irrational. Classic microeconomic theory contends that there is no such thing as an above average investment opportunity. All ideas – when subjected to competitive and market analysis – can be analytically deconstructed to a point of unworkability. Quite simply, the very undertaking of fund-raising for an early stage company is an irrational proposition. Embrace, rather than resist, this reality. With enthusiasm and persistence, appeal emotionally rather than just intellectually to prospective investors. While they may never admit it, the “gut” decision of investors is influenced more by these “soft” factors than it is by analytical and rational review. Have and communicate unwavering faith in your convictions and world view and avoid the analysis morass endemic to our information-overloaded world.
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