Having been in the position of raising capital more than once, I know what it’s like to pitch my business plan to potential investors. During this process, I have learned some valuable VC lessons that I’d like to share those with you. This article covers three key principles of fundraising.
The first asks you to put your feet in the shoes of a potential investor. How can you inspire them to want to invest in your business on an ongoing basis? What is the justification for the capital that you are requesting? The second explains the true cost of fundraising. I’ll give you a hint: It’s not just the money spent on the headcount associated with fundraising. Lastly, I’ll give you some ideas on where you can find the funds. It might be closer to home than you think!
Milestone Based Fundraising
Many organizations begin the fundraising effort for entirely the wrong reasons. If you ask an organization or entrepreneur why they are raising capital, the response is often, “Because we need it!” While this may be entirely true for the venture, this is not the case for the sources of capital from which the entrepreneur will be seeking to solicit this capital. VCs hate to hear that the venture is raising money because they “need it” as it implies a failure in planning and that makes them uncomfortable.
From the perspective of a financier, it is much more provocative to hear that they money raising effort is based on an inflection point or natural milestone in the evolution of the business. For example, the money will be used to develop the next version of the product, tap into unexplored markets or develop new revenue streams, or ramp up production to hit massive new volumes and revenues. Plan to raise capital on an ongoing basis (even if you don’t need it) based on major milestones your organization has achieved or is on the cusp of achieving. The most powerful tool an entrepreneur can walk into a VC’s office with is a milestones page, which highlights all of the major achievements accomplished with the capital invested and the next few on the horizon requiring additional capital. Rarely does this approach fail. On the other hand, the “I need it” model to raise capital frequently does.
The True Cost of Fundraising
Organizations often make the mistake of calculating their costs to raise capital as equal to the actual costs involved in raising the capital itself, meaning the salary of those dedicated to the efforts, the cost of support services to supplement the fundraising process and hard costs incurred during the fundraising process itself. Do not be fooled into believing that this will be your true cost to raise capital. A successful fundraising effort, hopefully being spearheaded by one person in your organization, will definitely involve other people’s time as well.
In reality, financials have to be sorted, sales projections assembled, product vision articulated, and all of these require input from different people in the organization. In fact, it’s often the case that the product roadmap needs to be more clearly defined, articulated and explained in great detail to investors. Another good example is the dread “roadshow” which often requires substantial time from the senior leadership team of the venture to go and meet with investors to close the round. All of these activities can chew up huge amounts of your management team’s time. Therefore the true cost of raising capital includes all of the lost opportunity cost of the organizations resources devoted to raising capital in addition to the direct costs. So, be mindful of these expenses. Successful entrepreneurs plan accordingly while raising capital throughout their venture’s life-cycle.
Look in Your Own Backyard First
Often organizations are so focused on getting capital from that “luminary” or “hot” or “brand name” VC or fund, that they forget just how close to home capital can be found. In most major metros, there are multiple VCs who are both locally available and who are specifically looking to support businesses and ventures in their geographic area. Furthermore, some of the best resources to tap for access to this capital is the venture and key leader’s extended friends, family, vendors, partners and customer network.
One of the hardest parts of raising capital is establishing credibility in the eyes of the source of capital; this is easier to resolve with the “friends & family” network approach. The focus then is on selling the concept and its viability, not getting the meeting. While it may be harder personally to approach this crowd, the benefits of doing so far outweigh the disadvantages. These guidelines are designed to help your venture more effectively and successfully manage the fundraising process.
For more information: Check out Do’s And Don’ts When Friends And Family Fund Your Startup By Laura Schreier for more specifics on borrowing from friends or family. Read Here’s How I Launched My Startup Without Investors by Pini Yakuel for ideas on how to launch a venture without investors. Another helpful article is Do Your Homework and Avoid a Venture Capital Nightmare by Harry Red.
About this blog The goal of this blog is to share my experiences, to capture and reveal valuable insights, and to draw from my serial entrepreneur-ship through 7 ventures over the past 20 years. I have encountered many impressive entrepreneurs along the way and I hope to share our collective experience with you to help teach and perhaps motivate you to launch your own B2B or B2C enterprise.
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