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)

Fundraising & Startups

They say that a downturn is the best time to get your startup going, so I have gathered together a few good links below with a few thoughts on this topic. This article will also push out a few thoughts on approaching fundraising. There is a lot out there on this topic but I want to give a slightly different perspective and look at it from the people/person that assist the companies in securing their investment.

5 Startup Myths

The first link is a website called ‘Small Business Trends’ which was sent from my Google Alerts and I have chosen it because it approaches the subject by debunking some prevalent startup myths. The Small Business Trends article can be found here.

First Time Fundraising

If you’ve never really approached fund raising for your business outside of bank loans or an overdraft, then you probably have a lot of new ground to cover. Perhaps you are considering trying to secure private investment from business angels; ‘trying’ very definitely be the operative word as you embark on trying to convince an investor that they can make stacks of money with your highly lucrative business proposition.

Bootstrapping

Before you start entering into such conversations, let’s look under the hood a little first, just to make sure your approach to business will not scare off investors upon first sight. Are you operating a lean operation by ‘bootstrapping’ your business and keeping your operating costs as low as possible? Here is a good article (from a new media/new tech perspective) by ReadWriteWeb on Bootstrapping. Then there’s this article too from Doug Richard on how to survive a downturn (it’s mainly for established businesses but has some good general nuggets that can be applied by startups and established businesses alike). Guy Kawasaki of Garage Ventures shows why taking a bootstrapped plan b to VCs is much better, here. And finally, some good nuggets here too. For an alternative (anti) look at bootstrapping, see here.

Investment Ready?

Ok, so your now operating lean, you’ve pulled back the operating costs and believe that private investment is the way forward towards your hockey stick growth curve (see point number 3). First big lesson, private investment is not a variation of getting a bank loan, i.e. you can meet all the criteria for a bank loan and have a reasonable expectation that you will get your loan. With private investment there are numerous reasons why you might not get the investor’s cash, even when you can successfully tick all the given criteria. For example, the returns might not be high enough, they might disagree with you on how big the size of market share is, they might not believe in you or your team that you can deliver what the business plan says, or, they just might get an itch that you might not get on well together. Getting equity investment can be a lengthy, time consuming and in many cases, fruitless task. They might love you, love your product, believe in the exponential growth potential forecasts but the whole process can go belly up once the due diligence process kicks in.

Another point worth taking note of is that in most cases it will cost you money to get money, unless you have managed to get direct access to a range of ‘high net worth‘ or ‘sophisticated‘ investors, you will have to go through intermediaries and they will want paying for their work. Typically, they often take around a 5% ‘success fee’ for funds secured. There may also be fees for additional work undertaken, depending on whether you work with an agent like me, or with one of the angels network.

I would also advise against thinking that all that is needed is for your business plan to be thrown out there to land in the inbox of multiple investors. It’s more than just emailing your businesses plan (or executive summary) out to a database of investors. Investors are too busy to look at numerous business plans every week. Someone somewhere has to be paid to soft through them all and pick out the good ones. Investors also rely and prefer often to work via recommendations. Even if you are one of the good ones, you still have a million and one reasons why even after being successful in getting a pitch opportunity, you might still not get the money.

[I have a lot more written on this. If a get one or two requests (comments can be added below) then I might consider putting more in here on this subject, or do feel to contact me personally about this].

Some thoughts

• Realise that it costs money to get money.

• Most (over 90%) businesses that apply for investment, don’t get invested in. You might need to: try – fail – make adjustments – try again.

• Have you or the other Directors put money into the business also? This is kind of expected and gives investors a degree of comfort to know that you believe so much in this venture that you have put your own money in also.

• If there is IP, have you taken steps to protect it?

• Have you got a ‘plan b’ in case you get partially funded, could you roll out in stages instead?