October 29, 2012 Leave a comment
Lining Up Your Fundraising Approach (Access & Assumptions)
Don’t Treat Fundraising As Just An Access Issue. Too many assumptions – Don’t assume, prepare!
One of the hardest things about my work is pushing away companies that are looking for investment. Industry figures say that around 95% of businesses looking for investment fail in their fundraising attempts. In this series I’ve been looking at some of the reasons that I frequently see which ultimately lead to that fail. This 6-part series is not meant to be definitive but just a collection of some key thoughts and issues that get in the way for founders as they look to fundraise. This article is more pertinent to the way founders approach intermediaries or brokers (either solo fundraisers, angel networks or corporate finance firms) and picks up on the lack of understanding over the nuances of the angel investment landscape and how to get connected to investors. In essence, the big mistake is to just see introducers as just connectors (i.e “if you can just make an introduction and give me the investor’s contact details, then I will do the rest”).
I see too many founders launching themselves into a dearth of fundraising activity in the hope that somewhere along the line they might connect with a likeminded investor or hit a lucky break. Being an occasional fundraiser/broker, I get many requests from company founders asking if I can introduce them to angel investors. Frequently, it goes something like this … “here’s my executive summary, let me know if you know anyone who might be interested in investing in this.” The problem is that there are several assumptions usually being made when someone says this to me and they broadly fall into two categories.
1) Being ready for the deal:
Usually the biggest assumption is that they believe they are ready to speak to investors, overwhelmingly, they rarely are. They presume their deal proposition and the way they are communicating it is ready to put in front of investors; we call this being ‘investment ready.’ Perhaps they have managed to get a decent business plan/executive summary/pitch deck together and would no doubt feel at ease answering questions, such as, “what size or where is your addressable market?” or “when do you expect to reach break-even?” or “who do you expect to exit to and for how much?” However, there is a stage beyond this and very few get to it. It’s called ‘deal ready.’ Being deal ready means configuring the deal opportunity with the aim of de-risking it as much as possible to make it easier for an investor to say ‘yes.’
2) Don’t treat fundraising as just an access issue:
The second assumption and this is more usually the territory of first timers, is a lack of understanding of how to go about raising finance or how connections and introductions in the investment landscape are made. Founders often perceive getting investment is just a question of getting access … “if you can just give me the contact details (i.e. the access), I’ll give you a small slice of the deal for your trouble.” Just by the virtue of having a business plan or an investment opportunity, they feel they deserve the access that they are seeking. But a broker is also a gatekeeper and deal sifter. Before they will give that access, a review of the proposition is needed. If it’s not ripe for an introduction then it will be rejected. Some entrepreneurs feel that the best strategy is to sign up as many brokers as possible but this is an approach that fraught with difficulty. ‘Spray and pray’ is not a realistic strategy and means that you end up with several brokers giving your deal a light touch. If they can place it easily they will but they won’t spend much time on it. I see many founders wandering around from angel to angel or angel network to angel network, hoping that eventually someone will believe in them and their propositions and say yes. If I just connected up all the businesses I could with investors without paying heed to whether the proposition was good enough, I would get a reputation for throwing any old deal out into the community; I would become a deal spammer.
Experienced people know that the investment community doesn’t work that way. Those that don’t, float around reaching out randomly asking “if you think you know anyone that might be a good match, could you introduce me to them?” It is very rare that I will engage in such a random approach and make that sort of casual connection. Ultimately, I and others like me (angel networks included) act as a sieve. If I don’t think their plan is good enough, why would I risk my reputation and send out sub-standard deal flow. There’s no way I would send out such business plans or summaries, let alone give out investor contact details. If the company and the deal is good enough, I have to get under the hood i) so that I can get to the stage where I think I can get behind the deal and ii) spend time helping the company to write a better executive summary. The summary is so important, it’s the foot in the door and it has to be close to perfect.
Accept, nay embrace, the sifting process so that you can come out the other end knowing where your weaknesses are. Then have a period to make changes according to the feedback you’ve been given, then you can start to fundraise. Here’s a good way to map out your fundraising campaign.
1. Documents > Put together both an executive summary and business plan. Obvious I know but you’d be surprised…..
2. Testers > Devise a list of three investors, or individuals in the landscape who you would not necessarily be looking to invest but who might be happy to give you feedback on your ‘investment deal.’ Ask them, “if you had the money, is there anything that would stop you investing in this proposition?”
3. Revise > Makes changes, possibly revise your strategy according to the feedback you’ve been given (these maybe quick changes that could just take weeks, or painfully slow ones that may take months). In essence you are have made changes to de-risk the opportunity for investors.
4. Embark > Now take your deal out; directly to investors if you can, or if you can’t get or don’t have direct access, then either i) put together a PPT and stand up and pitch at angel networks, or ii) find a broker or intermediary to represent you (the above mentioned solo fundraisers, angel networks or corporate finance firms). Beware though, to get ‘success fee only’ representation (i.e, no win, no fee) you and your deal have got to be not just good but really really good, especially in the current climate when even more companies are competing for the same investment that you are.
Please do leave a comment or question. Was this helpful, interesting or totally off the mark?