Why is Fundraising So Hard? (Part 1)

cashAre you Fundraising? Have you considered what you would do if your fundraising was not successful? 

As over 95% of startups fail in their fundraising attempts, surely this is a key question to consider before you consider stepping out.

So, you feel that you have a good deal to take to investors. You’ve spruced up your pitch deck and seemingly crafted a half decent executive summary and business plan. However, after pitching to investors for 6 months, the best bites you have received have been minor questions from a couple of supposed investors, who were just really tyre kickers and consultants pretending to be investors who were looking for fee based work. No one has seemed remotely determined to enter into a deal conversation, let alone make you an offer. This has invariably led you to ask questions; “is it me, is my pitching/presenting not good enough, am I saying something wrong, do they not believe in the opportunity, the space, the team, the product,” etc and of course the list goes on and on. Perhaps you’ve been fortunate to even get a partial offer but unless its a significant majority of the amount originally asked for (say at least 60%), you’ve still probably failed and won’t be able to proceed, even with a partial raise. When it gets to 6 months with no firm full investment interest, you need to be taking a long hard stare in the mirror. As Sir Alex Ferguson infamously said, “It’s squeaky bum time.”

Stress-testing

One of the main reasons that I believe makes fundraising hard for most is the lack of time founders spend ‘stress-testing’ their investment proposition / deal. What do I mean stress-testing? Well, just running it past one or two people who know what they are doing and who might have some spare time to spread a critical eye over your deal before you take it out. Be prepared though if they suggest some changes that are not quick to implement, such as, get a bit more traction or complete development before you go asking for development – these things can take time. The app D RISK IT (www.drisk.it) should help with stress-testing somewhat when it is released in September.

Two reasons why stress-testing doesn’t happen …. (i) Time. It can take around 6 months. There is a misguided belief that you just ‘write up’ your deal and take it out on the road. Also, (ii) Money. There’s an unhelpful aversion to paying for help. I know most startups have little spare money to help them hunt bigger money but focusing solely on a ‘free’ only strategy is not a great way to advance in business. Free is ok when it’s digital but it’s human equivalent (i.e. fee) is not based on the revenue models that the digital freemium model is. Just as software-as-a-service has a fee ticket association, why shouldn’t consultancy, development or fundraising-as-a-service? Another reason that fundraising is hard is that ‘success fee’ only professionals would rather minimise their risk by working on larger deals that are at a later stage of development, preferably post-revenue. So they rarely accept a request to fundraise from a revenue startup unless they are totally hot. Most think they are but they are not, so the source of help moves on to a bigger more juicy and importantly, ‘traction laden’ opportunity.

As a founder, if you’re not a fundraising expect, what should you do? Obviously, get some help. If you can get it free, then fine, otherwise pay for it. Someone, said to me a long time ago, “it costs money to get money.” Don’t make the mistake of think it’s just a case of writing up your executive summary then going knocking on the door of as many angels as you can find.

So, what to do? …. Well, there is some good news in Part 2, coming soon.

(To get automatically notified when Part 2 is out, sign up to ‘POSTS’ using the RSS link above, top right-hand-side)

The Metrics of Fundraising from Business Angels

One way or another, right or wrong, there will probably be a cost to you to gain access to the angel investment you seek for your business – or as someone once said to me, “It costs money to get money.”

8875026_s3bUnfortunately many companies place the same expectations on gaining access to a discussion for angel capital as they do to access a bank loan

But it doesn’t work that way,  here’s why…

In many instances a middle layer is involved in sifting, introducing and shaping the deal flow that is presented to investors. This layer could be a freelance intermediary, a corporate finance organisation, an online marketplace, or an angel network that brings investors together to see investment pitches. Either way, people’s time is involved and obviously there has to be a cost to pay for that time, as well as the effort, management and draw upon resources.

There is the ‘free’ DIY fundraising route and this is to be very much commended for those who know what they are doing and have a well put together offering (and I’m not just talking about the business plan when I say ‘well put together offering’). Developing one’s own investor relationships is extremely worthwhile. However, be warned that this could be slow and time consuming and at worst, you could have spent a lot of time and effort just to find out that you were a long way off from being ‘investor ready’.

If fundraising is not an imminently mission critical activity and you have the ability to put occasional time aside, developing your own pool of investors is extremely worthwhile. It will help you gauge better how your proposition will be seen by the investment community, enabling you to make tweaks and changes along the way. Alternatively, the angel networks and pitching events generally do a good job at getting your ‘investment ready’ basics out of the way and your business proposition polished up nicely.

The Resource Drain

For some time now I have wanted to look at putting some sort of estimated cost value on the resource, time and effort that is involved in the campaign approach to fundraising. In particular, two fundraising campaign approaches:

1. the in-house DIY approach and

2.  the external hire approach

I then looked to see what data I could try and attach to the two.

For the DIY route I have been able to talk to executives within a biotech company that frequently has to undertake DIY fundraising to gain VC interest, as well as their bucks, to fund their latest projects. The chart below represents an approximated cost to the business in terms of time and money. I have adjusted the salary details downwards, to fall into line with a more likely salary position of an early stage company.

The details show the amount of time two individuals (the CFO @ 75% of his time and the CEO @ 50% of his time, both on £60k salaries) spend on fund-raising.

The chart shows an estimated in-house organisational cost of £37k to release 2 people to fundraise. I ran these equations past the company and they said the salaries for more established executives in their sector would be higher. The true financial cost for them, they said, would probably by closer to £80k each time they undertake fundraising.

So this is a typical costing of the resource time and effort. Now to look at the output from a typical fundraising campaign.

Depth of Campaign

Occasionally, I take on the work of a fundraising intermediary/broker on behalf of a business that I think stacks up well for investors. This means that I sift and select business proposals/companies before presenting them to investors. It should be said that no two campaigns are the same. Some can last 2 months some 8. Some can get investment from just contacting 10 investors; some can get funded after contacting over 100. I’ll leave you with some of the results that I pulled from a recent 6-month campaign.

(Emails)

Total of emails generated between all parties (i.e Inbox total for this campaign) = 504
Total of the 504 emails that were from and to the company team = 186
Total number of emails to investment sources (504 – 186) = 318

(Investors)

Total number of investment sources contact by email (initially) = 132
Total number of angel investors approached = 77
Total number of investing groups approached (VCs & Funds, etc) = 55
Average number of emails sent to each investor source (318 / 132) = 2.4

(Contact)

(Article written for iBusiness Angel)

Average number of phone calls to each investor = 4
Average time in minutes talking to each investor source (@ 2 minutes each call) = 8
Total time spent talking to all investors (8 mins x 132 investment sources) = 1056 mins = 17.6 hours
Time spent on dead/fruitless calls – no replies, secretaries & gatekeepers (6 calls average, 30 secs each x 132 investors) = 396 mins = 6.6 hours
Total number of meetings (including 2 scoping meetings with the company to start campaign) = 18

Look also at this article if you’d like to see what a sophisticated fundraising campaign looks like:  http://techcrunch.com/2013/08/10/how-we-closed-a-1-75-million-round-on-angellist-using-new-inbound-tools-and-techniques