(This is the second of a two-part series on fundraising do’s and don’ts. You can find Part 1 here.)
“Your startup will get funded.”
If only someone would have said that to you at the earliest part of your entrepreneurial journey. Better still if that someone wrote you a check on the spot. Wouldn’t life be grand? You could have just focused on building a great product, and never worried about raising money.
But reality isn’t like that. No one can ever tell you your startup *will* get funded unless they personally can and will make the investment without further ado. Reprising our “never” advice – never believe anyone who will tell you that if you do X you will always get an investment.
There are, however, a few things you can do to enhance the likelihood that you will attract the investors you want and get them to make the investment you need. On this end of the Funding Possibility Spectrum the work is hard, but your efforts have a high probability of propelling your company forward.
Here are the five things that will move you toward the High Probability end of the Funding Possibility Spectrum.
Your fundraising strategy
Customers first. Investors second. As an early-stage entrepreneur, it’s easy to lose sight of the fact that you’re building a business, not just a product. It’s really hard to even think about a “company” when the product is only a fraction of what you envision it should be some day. Nonetheless, the most effective fundraising strategy is to focus on building a truly great business. Instead of asking investors for money ask “what can I do to get lots of people to buy my product?”. The more you focus on engaging customers in your product development process and delighting them by solving a really important problem, the more likely it is that the capital you need is going to come from sales, not investment. But the best part is that, should you decide to bring in investors, your company valuation will likely be much higher if you have (real) sales! When you crack the code of delivering real value to customers (and getting them to pay you for it, not just agree to a pilot), you’ve taken a huge investor risk off the table. You may even find investors are now lining up at your door!
Choose your investors carefully. Ask a highly effective salesperson for some career advice and many will tell you that the key to success is making great use of your time. Time, you know, the biggest NON-renewable resource we have on this planet? It sounds simple, but it’s hard to do. Making great use of your time means ruthlessly prioritizing what’s important and what’s not. And in the world of raising funds for startups, you can easily get overwhelmed with all of the opportunities and challenges begging for a slice of your time. And that’s why choosing which investors you target for pitching your company is a critical key to your success. Every business or consumer is not the buyer of your product. Neither is every investor going to buy your stock. The most productive conversations are going to be with the investors who are focused on companies of your stage, technology and industry. Grade every investor on your target list with these three criteria using an A through F scale. If you don’t have any investors with all A’s, keep researching and networking until you find ones that do. These AAA investors are going to be your best investors – long and short-term and they are going to understand the problem you are solving better and faster than others. That means that the time to closing is going to be a lot shorter if you are talking to the right investors.
Be trustworthy. It sounds trite, but here’s the deal: making an investment is largely an act of trust. The investor is going to fork over some money and you are going to give up some equity and decision-making autonomy in return. The investor is trusting that you will do all things necessary to build a really valuable company – hire the right people, spend the cash wisely, and not engage in bad behaviors to name a few. You are trusting that the investor “gets” your business, will help you solve the many challenges that will be encountered along the way and connect you with other resources. When does trust “happen”? For certain it doesn’t just show up when you’re ready to close your investment round. It starts loooong before that. Humans trust each other because they have repeated and consistent encounters with an individual. If you share some bad news with an investor, you could get a variety of reactions. Take note of the reaction – did they attempt to understand the problem or did they just blow up and berate you? What happens the second time you deliver bad news? The third time? Did you get a similar reaction? If the reaction is consistent, you begin to trust that your investor is going to behave predictably in these situations. Of course, if you don’t like the reaction – even if it is consistent – you can move on If the reactions are different every time, then your ability to navigate a relationship with that person is really going to be challenging and no trust is being developed. The bottom line is that in order to be trustworthy, you need to build trust. And the only way to build trust is to build relationships early, perform consistently and take the time it takes to get to know your potential investors before you decide to create a long-term relationship.
In your business
Be different. Not better. Imagine you are an investor (and yes, I’ve done my homework and you are my target investor). I open my pitch deck and the first thing I talk about – with all the passion and excitement that I have for my solution oozing into the conversation – is how I’m going to create a faster automobile for consumers. If your reaction is like most, you are already yawning and you’ve instantly decided that you are not going to invest in this company. I might have developed the most breakthrough, patent-able gizmo there is for making cars go faster, but it is highly unlikely investors will care about a faster car. Why? There’s a ton of reasons – from the power of the incumbent automakers, to “nobody cares” since there are speed limits that need to be adhered to and, if that wasn’t enough, the high cost of commercializing my brilliant invention. My pitch would be DOA and I probably wouldn’t need to stick around to hear the investment conclusion. On the other hand, if I open my pitch with a narrative about a new way to think about cars – cars that don’t need a garage, cars that never stop at the gas station and cars that might decongest our freeways – I can bet that the conversation gets very interesting very fast (or there was, at least, a point in time when it would have). Sure both pitches are about cars, but the second one is a completely different concept (not just better) and one that has an out-sized appeal to an investor. Note that this “be different, not better” topic is under the heading “in your business”. We’re not talking about putting lipstick on a pig. Just talking about my simply-faster car in a different way is not going to change the conclusion. We’re talking about creating your product, your company and your category around something that is truly different. Of course if you do all that, it’s way easier to make your pitch be different too!
Customer clarity. Vectoring in on a super-crisply defined customer segment is critical. We’re not talking about being clear that you are a B2B or B2C business. That’s a necessary place to start but totally insufficient. Even your assertion that “all manufacturers” (for example) are your customers just totally misses the point – even if you are building a software platform for manufacturers! Manufacturers come in all shapes and sizes. “What” they manufacture differs. Their supply chain configuration differs. The degree of custom work vs. automated assembly differs. There are profitable manufacturers and unprofitable ones. Some manufacturers have an “operate efficiently today” mindset while others are aggressively adopting technologies of the future. To mask these differences and claim that “all” manufacturers are your customers is just sloppy homework or potentially a fake representation (see Part 1!). You want to know your super-well-defined segment like a leading actor knows their part. You want to learn their language, their mannerisms. You should read their publications. Learn about their facilities, machinery, their key customers inside and out. Learn everything you can about them. When you do this, you will be able to spend less time selling and more time building relationships. Customer relationships like this are gold and convert easily into a trusted relationship that pays dividends! (sound familiar?) And that will drive revenue faster than the “sell-to-anyone” shotgun approach any day, every day. Laser focus on your customer makes your pitch deck shorter and more attractive to investors as well. You can spend less time talking about the myriad of opportunities you might have and simply explain how you are actually solving a huge problem for a specific identifiable set of customers. How refreshing!
These five behaviors and actions are not simple, but they have a high likelihood of yielding the results you ultimately desire – customer traction (aka revenue) and the right investors. Skip or skimp on any one of these activities at your own peril!