(This is the second of a two-part series on fundraising do’s and don’ts. You can find Part 2 here.)
OK – you’re right. Never say never.
But when it comes to getting your startup funded, you likely don’t even want to come close to “never”. Even “unlikely” is not a good place to be.
In this first of two posts I’m going to set the endpoints of the “Funding Possibility Spectrum”. This post will explore the end of that spectrum you will want to avoid at all cost. The next one will illuminate the endpoint you want to be as close to as possible.
And yes, it is a spectrum. I don’t believe there are 10 rules that will magically get your company funded .Nor do I believe that there are 10 rules that will absolutely ensure that you never get funded. In fact, I’m reasonably confident that there’s been a startup somewhere in the world that has committed all six of the sins below and still received money from an angel investor or VC. The legends about entrepreneurs who knocked on scores of investor doors before finding the one that believed there was potential in the entrepreneur’s idea are what fuel the hopes and dreams of many founders. And it can happen. I’m just saying, if you want to make fundraising harder or nearly impossible, then you should definitely try the things below.
Recently, we’ve been interviewing companies for our next Accelerator program cohort. We make an investment in these companies and our mindset is totally that of an investor. We see all sorts of companies, but mostly companies at the early stage of two founders and a prototype, and not much more. What follows is gleaned from my these interviews, my cumulative experience as an investor and as a member of early-stage teams. Entrepreneurship is hard. My mission here is to make it a little less hard when it comes to seeking investments in your company.
Enough prelude. Let’s get to know the end of the “Funding Possibility Spectrum” you should avoid at all cost – the six sins you should never commit.
1) Fail to do research on the investor you are meeting with. When you are actually in front of a potential investor your time is limited. You feel the pressure to make sure the investor understands your incredible opportunity. You don’t have time for small talk, etc. so you dive right in. Well, you just lost the game. Have you ever heard of a professional sports team that just shows up on game day without ever having watched the film of your opponent from previous games? That’s probably never happened since the earliest days of film. Why? because to play a powerful opponent without understanding their default moves or standard set plays would put you at a huge disadvantage. So before you start blabbing away and never realize that you are talking to someone who actually knows your industry way better than you do, do your homework. Did the investor have a career before becoming an investor? What kinds of investments have they made before? Are they in your space? Can’t find any information? Then take the time to ask in the meeting before you dive in. Skip doing the homework at your own peril. Omitting the background checking will pretty much guarantee you’ll look naive and stupid.
2) Explain your startup (in front of an investor) by illuminating the myriad of unique details that are in your prototype. Have you heard this before: your product is NOT your company! It’s been said so many times and yet I still see entrepreneurs who appear to not know the #1 reason entrepreneurs fail: they fall in love with their solution. (A tip of the hat to Ash Maurya!) Other than a brief screen grab and 30 seconds of explaining what your product actually does (i.e. how the user will accomplish something meaningful with your product), focus your pitch on your business not your product. Your product will morph and change over time, especially in the early days of your company. The investor would much rather hear about why your company is going to create a totally new market that no one has yet imagined. If you are simply selling your product, then expect the most the investor will ever write a check for is the price of your product and not a penny more.
3) Fake your traction. “Oh, and I’ve already got $25K month in recurring revenue!” Sure you do. Its from your brother-in-law’s company or the last gig you had and they probably aren’t really paying you for the product you’re creating. Or maybe its a legitimate unrelated third party but its from a version of your solution you’ve already pivoted away from. Either way, these”customers” aren’t the profile of the customer you just identified as belonging to your BF market! Don’t get confused…this “revenue” is a way to bootstrap your company. It doesn’t mean a damn thing relative to the value of your company or provide any reason at all for an investor to invest. In fact, it’s probably harmful because in order to get this revenue stream to continue, you have to do some things that aren’t going to help you turn your grandiose vision into a reality. Furthermore, when the curtain is pulled back on your $25K MRR and exposed for what it is, you just lost a ton of credibility. As a former CFO, I can smell “fake” revenue a mile away. And when I hear that, you might as well end the presentation or conversation right then.
4) Fake anything. We (investors) get that you are an entrepreneur and its written somewhere that you have to be a promoter/evangelist of your business 24/7 and never have an ounce of doubt that your company is going to be a unicorn. But claiming you are going to be a unicorn when the customer logos you show are simply companies you are thinking of contacting (and you claim they are “interested prospects”), or by claiming you’ve got some incredible “carbondingulator” (thank you Christopher Lochead) under your hood when all you have is a squadron of people manipulating a bunch of spreadsheets – that’s disingenuous at the least and maybe down right fraudulent. From the moment you first interact with a potential investor, you are building a relationship. If you are basing that relationship on false claims and assertions, your new BFF will be anything but “forever”.
5) Fail to do a few Google searches to discover your product’s competitors. Note the emphasis on product! Sure, Company X is a competitor because they are “in your space”. But the focus of these searches is to discover what people currently do to solve the problem you think you are going to uniquely solve. You think your idea is special? Try searching for a solution the way someone with the problem you are solving would try to search for a solution. And I mean really try. Forget that you believe that no one has imagined or created a solution like yours. Search as if you were the customer who was going to buy or use your solution and Google for a solution. Do at least 10! Let’s say you have a really innovative way of organizing photos of your kids. Don’t just search for “kids photo organizer” (i.e. whatever name you’ve given to your wonderful invention). Search for “photo organizers”, “album creators”, “kids photo sharing”, etc. Get out of your own box and think like your customers might think. It’s highly likely that there are very similar solutions already in existence. Are those solutions still around? If not, why did they fail. Maybe there just wasn’t the gazillion dollar market you thought there was.
6) Answer an investor’s question with a 20 minute, rambling monologue. Just because you finally got that meeting with an investor doesn’t mean you’ve got to tell them everything you know. The receiver of your verbal vomit is human. And guess what, humans have an incredibly short attention span. We read headlines to get the news because we’re always in information over-load mode. When you rattle on for 20 minutes, how many headlines did you toss out there? How many of those made an impression? Furthermore, this monologue shows total disrespect of the investor’s time (and frankly, yours as well) and demonstrates a total lack of focus and clarity about the purpose of the meeting and your business. (PS I’ve seen angel investors and VCs who are also guilty of the monologue sin, virtually ensuring that good startups will not be giving them an opportunity to invest.)
So there you have it. Committing these six sins will make the job of being a high-growth, startup entrepreneur sixty times harder. Save the effort and focus all that energy on really doing something different…or, at the very least, read Part 2 of this article and move yourself to the productive end of the Funding Possibility Spectrum!