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)

6 Key Thoughts Along The Fundraising Journey (Summaries)

This article summaries the recent  set of 6 articles that I put together under the above title.angelinvestor

No1 – You Think You’re Ready To Talk To Investors But You’re Not

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.  Knowing how to configure and execute an investment proposition is the key component missing from most founder approaches to investors. The solution is two-fold. Firstly, in your executive summary or pitch deck, ensure you tell your investment story and not just your business story. Secondly, get some help from someone who has previously been through the process and who can make you ‘investment ready.’

No2 – Investor Criticism Now Can Lead To Investor Funding Later

It is a kind and helpful investor who despite their busy workload, chooses to give feedback and their thoughts as to why they do not want to look further or invest. This information or advice can almost be worth paying for because in the long run it could save time, effort and financial resources. Think about working with the feedback to see if some strategic changes can be made, or take their comments and try to find a way to de-risk your opportunity for the sake of any future investor conversation. If you are fortunate to have put yourself in front of several angels but received a rejection at each turn, see if there are any common criticisms. If they are all saying similar things then you have good food for thought as to why you might not be getting funded.

No3 – It’s Not All About Your Business Idea

The statistics show that the odds are heavily stacked against every milestone of business success that you are hoping to hit. From staying in business more than 3 years to procuring angel investment, the odds are not in your favour. Business ideas that have not developed into an investment proposition just won’t catch investor eye-balls. My belief is that founders often feel that if they can just hook the investor with the opportunity then all other considerations will take care of themselves. Most investors are not looking for good ideas per se but for ideas that have begun to prove themselves by gaining some form of validation and/or traction. The potential of the opportunity does not override all other considerations. There is always an abundance of investment opportunity out there for investors but an ‘investment proposition’ is different, it’s an idea or an opportunity wrapped up in as much tangible market place proofs as possible.

No4 – Validation & Traction – Two Crucial Words When Looking For Investment

Providing proof points to show that potential customers are both interested and then likely to buy is vital in gaining investor interest. These two proof points are called validation and traction and achieving them can both significantly de-risk the opportunity for the investor and increase the possibility of a deal being struck. Validation is about proving that there is market interest. Engaging a little bit with that audience and getting early feedback helps your investor see that real people or real customers believe in your offering also. Traction is about giving your investor an early and mini demonstration that real people will pay for what ever it is that you are offering.

No5 – Investor Contact – A One-Hit Pitch or Contact, Not an Unfolding Mystery

A frequent frustration when receiving incoming investment enquiries is when the enquiry is drip-fed or trickles across the internet to me via a string of emails. You may not like it but you will be sifted and most likely moved on quite quickly. 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. You get one shot, so make sure it’s your best. Be prepared, be focused and be thorough.

No6 – Don’t Treat Fundraising As Just An Access Issue

I get many requests from company founders asking if I can introduce them to angel investor. 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) They believe they are ready to speak to investors, overwhelmingly, they rarely are. Even if they are investment ready, they still might not be  ‘deal ready.’ This 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’ to.

2) The deal is good enough and if they had access then they could do a deal. A broker (including angel groups and networks) is also a gatekeeper and deal sifter. Before they will give access, a review of the proposition is needed. If it’s not ripe for an introduction then it will be rejected. 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.