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)

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6 Key Thoughts Along The Fundraising Journey (No5)

Investor Contact – A One-Hit Pitch or Contact, Not an Unfolding Mystery

(Image Courtesy of FreeDigitalPhotos.Net)

“You get one shot so make sure it’s your best. Be prepared, be focused and be thorough. “

A frequent frustration when receiving incoming investment enquiries (either for the angel network I run, or for me as an independent fundraiser) is when the enquiry is drip-fed or trickles across the internet to me via a string of emails. The most common contact or access into angel finance tends to be via ‘pitching events.’ However, company founders also seek out investors directly where the first point of contact would be by email or a message via LinkedIn. The problem is that these digital introductions can be a very time consuming experience for those on the receiving end. You may not like it but you will be sifted and most likely moved on quite quickly (hopefully politely) so that the next business propositions can be reviewed. Remember, investors are looking for the best of the bunch, as soon as they see the investment opportunity, if it’s not in the top bracket, then they need to drop it quickly and move on.

Bad scenario #1:  An incoming email with either, i) a 30+ page business plan, or ii) a 15+ page powerpoint pitch deck. My reply, “Dear founder, would you mind sending me an executive summary or a short 1 or 2 page overview of your proposition. If you don’t have one, please see the attached example (N.B. I often send out an executive summary template). I’m afraid I wouldn’t get my work done if I had to read business plans all day long.” The normal review and sift process takes about 20-30 seconds (similar to a HR recruiter), therefore don’t make the reader work hard or reject you just for providing too much information. Yes it’s true, at this stage it is possible to provide too much information.

Bad Scenario #2:  Incoming email with an attachment but with an explanation that “the financials are not quite ready but I’ll email them over later in the week,” or, “I’m waiting for the result of a really big deal. I’ll keep you posted as things become clearer.” Don’t assume that the reader will remember you or your business proposition when you next email or call them. Many investors and investing groups can get anywhere between 10-30 investment propositions a week.

The best advice I often give out is in focusing companies on how to make a decent executive summary. This summary is so important because it’s your foot in the door. Be unfocused in this and it will lead the reader to suspect that if you can’t write a half decent 1 or 2 page executive summary, then it’s quite likely that the same focus and attention to detail is likely to be seen in every aspect of the business and its associated business plan. The problem with many summaries is that they max out on market aspects and also on product/service information but with very little on the investment proposition being offered to investors. They frequently fail to address the main required question: “how are you going to make money for an investor and what can you show to support this?”

Take a look at some of the summaries in the ‘Deal Activity’ section of this blog. I find this format seems to cover most of the urgent things you should communicate to an investor.

Your feedback and comments to this article, as ever, are always appreciated.

6 Key Thoughts Along The Fundraising Journey (No1)

You Think You’re Ready To Talk To Investors But You’re Not

(Image Courtesy of 123rf.com)

Sifting through a volume of investment enquiries, trying to get to ‘the good ones’ can be quite a burden for angel investors, fundraising individuals and VCs alike. I say burden because to engage with company founders and entrepreneurs whose businesses are not ‘investment ready,’ let alone ‘deal ready,’ is not the most rewarding way of spending your time. The problem is that most who come with business proposition clutched firmly in hand believe that they are ready to talk a deal and deserve the time and attention of the investors they pursue.

If I was to put a percentage number from the businesses that I see that I would take to investors, it would be between 5-10%. Which leaves a lot of businesses fumbling around with the misguided belief that investors should be drooling over their business idea.

A lack of understanding, training and experience as to how to configure your business to attract investment is a very real issue and the main stumbling block for entrepreneurs and founders as they seek finance from business angels. Colin Willis of the investment acceleration program Ignite100 says, “In the UK there is not an equity gap but an execution gap.” I wholeheartedly agree. The only experience many have of raising finance for their business is perhaps the sourcing of a bank loan, or maybe funding from friends or family. The professional equity investment community is a whole new level of experience with its own unique set of unwritten rules. A simple business plan may have been enough to convince the bank manager for a loan in the past but to get money from angel investors, your business investment proposition needs to explain and show a whole lot more. Knowing how to execute an investment proposition is the key component missing from most founder approaches to investors.

It wouldn’t be right to leave the article here without suggesting some form of cure for the problem. One of the easiest ways to get investment ready is to make contact with your local angel network. The following page on the British Business Angel Association outlines the angel funding process (here) and elsewhere in the site UK angel networks are listed. Be prepared, there will usually be some sort of fee involved in helping you develop your investment offering.

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The next 5 articles will follow soon.

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


How Many Frogs Can You Kiss In 6 Months? Early Stage Fundraising

(Written for iBusiness Angel)

Fundraising is not for the fainthearted. Anyone who has ever tried and been successful in courting angel investment will know only too well that the process of attracting investment into your company can be slow, time consuming and energy sapping. It can be an all-consuming task that can keep a person engrossed full time over a number of months. The fastest I have ever managed is 3 months (from agreeing to fundraise, to cheque in the bank for the company). Others may have been fortunate to have got funded quicker, most will be familiar with a 6-12 month fundraising period but either way you’d best assess your ability to handle the task in-house.

(Image Courtesy of 123rf.com)

It may seem obvious to state but if you are considering raising angel finance for the first time, it might be helpful to accept that you are entering a new and foreign landscape. A landscape that has its own rules and ways of working that will be different from other forms of finance that you may have accessed to date (which may have only consisted of raising a bank loan and/or some form of government grant). Imagine I had a sales job in b2c retail but then moved over to b2b software sales. I would have to familiarise myself with the differences in ways of operating and would have to get my head around all sorts of adjustments in terms of product shipping cycles, profit margins and cash flow issues. Similarly, in the equity investment sector where business angels look to part with their money for a scaleable opportunity, approaching angels for investment is not the same as approaching a bank for a loan. Just because you and your investment proposition may seem to meet all the likely criteria that an investor would look for, you can still be far far away from gaining interest and you’re stuck not really knowing why. You may feel that you have all the boxes ticked that in pre-recession times would probably get you a bank loan, but with angel investors, even if you did supposedly have all the boxes ticked with your mouth watering ‘hockey stick’ of an investment opportunity, there are a million and one reasons why you may not get funded. The general consensus is that over 95% of businesses seeking angel funding are not successful in raising early stage angel investment. Still want to give it a go?

• Do you have the resource capacity and capability to fundraise?

The fundraising process can suck you in and you may soon find that as the main force of driving your business forward growth or development suddenly take a back seat as your time and energy get deflected towards the task of courting investors. As it is often said, you first fundraise is likely to be the ‘hardest deal’ you’ll ever have to do. It’s not just the kissing of numerous frogs that is the drain but also the subsequent dating process with the ones that show interest. As I said above, try to think 6-12 months of near enough full-time activity but beware of taking your eye off the ball, i.e. the businesses development or sales targets. You may find yourself losing credibility and having to explain to investors why sales have dipped or progress has stalled. If you are an established business, be careful that the fundraising process does not put stress on the businesses cash flow position.

• There is free stuff out there – Make use of it.

For those of us in the UK, we are fortunate in that through local government business support, we currently have the ‘Business Link’ support network across the country. Make use of them as you may be able to get free, or at least discounted support. There is of course a wealth of online material that can be read and accessed for free. There are also websites that can be subscribed to via RSS feeds, as well as informative podcasts that can be downloaded via iTunes. Call this your research phase and start it early.

• Investors talk and investors remember.

It is quite common for me to send out an executive summary to an investor or investment group only for them to say something like, “Yes, I know of this company. Are they still looking? We took a look at this last year and told them to come back once they have a little more traction. Have they got any sales yet/did they get the product out?”

You don’t have unlimited ability to approach the market place. Think and act as though you only have one chance and that means don’t ‘knock out’ a business plan or executive summary with the notion that the business is best explained in a conversation. It might well be true but if your business plan does not set up your shop clearly and succinctly you may not be given the opportunity to have that phone call or meeting about your business proposal. Remember, your first shot is your best shot. You may be lucky and subsequently squeeze an investor out of nowhere but by and large, once you are in the investor domain (landscape), your name and company often get discussed (perhaps at an investment network) and in some cases investors have already come across you as your executive summary might have been emailed from one angel colleague to another.

• What are the implications if you don’t succeed?

Coming up short of the funds at the end of this process can make you seriously question whether you really have a business on your hands worth pursuing and that folding it might be a very real consideration. If you are fortunate and have the time, money to live on and inclination, you could possibly regroup and reconfigure by asking for less, changing to a different revenue model or chasing a different target audience, etc.

Or, if you can wait for the slower sales trajectory and decide instead to dig your heels in deeper, roll up your selves and resolve to grow slower via organic revenues, then maybe you can skip the ‘seed’ round and go on a year or so later to a VC or super angel A-Round (£1-4m ish). This should allow you to keep more equity for a longer period than if you’d also done the seed round first. Sometimes this is not a poor second option. It is worth noting though that businesses with some sort of traction or validation (in terms of established turnover or a decent audience size), usually come with a higher investor desirability. You may therefore find that if you tried again in 12-18 months with some ‘proof points’ ticked off, you may bring in that investment capital and expertise.

• Are there any additional fundraising options?

“Options for what?” Should be your first question because fundraising is a process and not just a question of someone opening their contact book to investors. My view is that investment readiness (IR – very often means preparing your written and numerical data) and fund-raising (FR – the activity of linking business to investment source with a view to discussing a deal’s potential) are two different specialisms but this is a whole other subject that I have blogged on elsewhere. I have a colleague who feels that between the IR and FR comes something called being ‘Deal Ready’ and I would agree with him. The problem is that the investment ready and fundraising get mixed together in the fog of the angel investment networks. These networks are a genuine route for companies to chase the skirts of business angels, some fine deals are done in these environments but there can also be an awful lot of spillage.  So, back to the point: some options you may want to consider can be found in the British Business Angels Association (BBAA) website. Look at their Directory for either Angel Networks or Professional Service Providers. If your opportunity is deemed of good quality and potential investor desirability, then you may get a fundraiser such as myself to work on success fee only. If you’re not quite ready and prossibly in the 95+% group, then be prepared to spend to get yourself into shape.

• And finally. Don’t underestimate investor feedback?

It’s not much fun if you find yourself in the 95+% bracket of business trudging round the networks hoping to spark some interest. And the reason you are t in the 95+% group? Well, something is probably wrong. It could just be that investors don’t feel that excited enough by the opportunity or its returns. It could be that they think you have overdressed the proposition and don’t give straight answers. As above… “a million and one reasons.” An investor’s “this one is not for me because …” feedback is very valuable. “Not one for me” feedback from 5 investors is immensely invaluable. If they all say similar things, then your lack of cash on the table is probably to be found somewhere in their feedback.

As always, please leave a comment. I always like to hear feedback.