Every day you don’t raise money for your company, there is one more day less likely to find it. You hear of the statistics: 80% of startups fail, mostly from the lack of capital; out of 10,000 or so business plans read by a VC fund, it only invests in 8. So the numbers against a start-up are daunting, if you follow the same path of those that fail — inability to identify and secure funding. Recently, a start-up company told me that it secured a small investment firm to find $1 million, but the investment firm failed to do so after three months. That company lost 3 months in which to secure funding. Other potential investors assume something is wrong with this company since it still has not raised any funding – almost as if the start-up is already guilty by association. A VC friend once said to me that he asks where did you go before him and if you said 2-3 other VC firms, he immediately suspects that there is something wrong with this start-up. In the real world, there is an actual example. In fact, when someone checks your credit, that is flagged on your credit report. And if there too many, then the next creditor suspects something is wrong. Equally true for a start-up company seeking capital.
Therefore it behooves any executive management team to find investment quickly and, most importantly, efficiently. What this introduction means, handle your capital raising no differently than a marketing campaign. Treat it as a strategic endeavor. The company is a “product,” the potential investors are “consumers”. When you treat this investment process in this paradigm, then you increase the possibilities of raising the needed capital quickly.
For a start-up, the capital sources may come from three leads – Friends and Family, Angel Investors, and VC Funds. F&F is fairly obvious. But let us look at the so-called investment firm mentioned earlier. Investors invest in companies they are familiar with. If the potential target is in the medical device field and both the investment firm and its clients have no experience in that area, why would they invest in the start-up? But this ignorance begs the question, why did the investment firm undertook the start-up as a client? Easily, the management team gets paid to bring potential investments or clients, and they are added to the quota or performance rating for the manager. Meanwhile, that start-up wasted three months waiting for the potential investment that never materialized.
VC funds and Angels are also capable of entertaining potential start-ups but fail to invest for different reasons. When the VC fund has exhausted its capital prior to the year’s end, the doors are not closed to invite other companies for presentations. They still look at other potential investments, even though they have no capital to invest. Meanwhile, the start-up team makes its pitch to that fund with the expectation something will come out of it. Now that fund will argue that it is raising another round, but how long will that take? I spoke recently to the managing director for a renewable energy fund where he only found less than half the required tranche funds and was travelling throughout Europe for additional capital. I would immediately assume that the prospect of completing the round is 6 months away. His office still functions, and he still held meetings for additional start-up companies. My recommendation in this scenario: don’t bother going that firm, go somewhere else where the indicia are in your favor.
Another reason a VC fund or Angel might invite a start-up is to see whether this company has a “leg up” on one of its portfolio companies. Since the VC team is always fishing around to see what is out there, it might invite that start-up if it has a similar technology to the portfolio company’s IP. Now VC funds need to invest in different market sectors in which it has had experience in order to mitigate risk and manage a diversified portfolio. If the visiting company has a similar technology, it has no incentive to invest in that presenting company. But the fund can gain some knowledge that will have an impact on its portfolio company.
Having said this, I always recommend any start-up, prior to presenting to the fund, to be up front and inquire as to the status of the fund and whether it has invested in similar technology in its current portfolio. In other words, like a product, will the VC fund is capable of “purchasing” this product and is very interested in buying this product? Therefore the start-up saves time and money, and goes to the next available VC fund, for the start-up has a singular objective – getting to that “money tree” sooner.