Category Archives: Funding / Capitalization

Why didn’t I get funded at the Angel event?

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I’ve seen more than 200 startup pitches in the last couple of years.

Most pitches do not get funded.

Sometimes people who don’t get funded reach out to me and ask, “Why?”

Here’s an example of why one entrepreneur’s pitch did not find any response from the Angels in the room:

Congratulations on your idea and your startup.

You have identified a pain point in the marketplace.

Also, as you probably discovered, while you’ve discovered a pain point in the market, nobody at the angel investor pitch event was jumping up to invest in your idea.

I think some of the reasons are:

  • Business model (service vs. product)
  • Scalability (business model and processes)
  • Sales model (scalability, efficiency, etc.)
  • Team (solo startup, almost always a big red flag)

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A Swing and a Miss

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As part of my consulting services, I am tasked with evaluating companies for VC, private equity and angel investors.

I recently attended a private pitch by an experienced entrepreneur to evaluate the potential of the company for some interested investors.

The entrepreneur was the prototype of what many aspiring entrepreneurs or early stage founders wish they could be:

  • Silicon Valley startup veteran
  • Multiple startups
  • VC funded in previous companies
  • Had successfully exited and made his investors money
  • Talented engineer

In short, he had a sterling track record, impeccable credentials and noteworthy references.

To the run-of-the-mill tech startup founder, he was the poster child for “who gets funded when I don’t.”

And, he failed.

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Crowdfunding

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A relatively recent form of raising money to start or grow a business is crowdfunding. Crowdfunding is crowdsourcing for money. With crowdfunding, you take in money from a large number of people, each of whom contributes a relatively small amount. Lots of people each invest small amounts of money, thereby spreading the risk of any one business failure among a large number of people and providing anyone who wants to be in the game the opportunity to share in the upside of a big startup win.

While this sounds logical enough, taking money from others in exchange for a piece of your business is a highly regulated activity in the U.S. So many scam artists have fleeced so many widows, children and inexperienced investors out of their life savings to fund non-existent or otherwise fraudulent businesses that the Securities and Exchange Commission (SEC) has made it very, very challenging to accept money in exchange for equity in your business.

The SEC restricts private investments for equity to people who are “accredited investors.” Accredited investors are high-net-worth individuals and people who can prove they are sophisticated, informed investors. The pool of accredited investors is not tiny, but it’s not the millions to billions of people who are available via internet crowdfunding.

The SEC is currently reviewing their restrictions and may authorize an officially sanctioned form of crowdfunding. In the meantime, it is caveat emptor, meaning it is incumbent upon you to ensure that any money you take from anyone in exchange for equity is in compliance with any and all applicable regulations.

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The Initial VC Pitch

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What should my initial VC pitch be?

When you set out to raise capital, one of your biggest challenges is to craft and deliver an effective pitch.

If you’ve got a business model that is suitable for Venture Capital (VC) funding, you will be participating in a very competitive environment for only a relative handful of capital allocations.

Far fewer than 1 in 1,000 VC pitches receive VC investment, so it is very important to make the most of your opportunity.

The first and most important factor is to research the VC firm before you pitch them.

First, research the VC firm itself. Start with the basics. Do they invest in your market? Do they invest at your stage of growth?

Next, ensure that they have an active fund that they are investing. If the fund is closed out or the remaining balance is being held back to sustain their portfolio companies through tough times, then the VC firm is not a candidate.

Last, check their reputation. Are they people who are assets to their portfolio companies? Do they add value beyond the cash? Talk to CEOs in their active portfolio and, especially, seek out CEOs from companies that the VC funded but later abandoned, shut-down or otherwise shared a negative outcome. It is very important to discover how the VC responds to adversity since every startup is a long string of adverse events overcome, one-by-one.

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Funding via MicroLoans

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Funding my business; all I need is a small amount to get started

By far the most popular challenge here at the Idea to Exit answer desk is funding a business, especially in the initial stages.

The first step in funding a business is to understand the basics of funding.

Those who are pursuing a small-scale, lifestyle business or bootstrapping their startup may only need a few thousand dollars to get their business started.

One path to small amounts of startup capital is a microloan.

Microloans are best known for helping people in developing economies build small businesses via loans of very small amounts, from a few dollars to a few hundred dollars, through programs from Non-Government Organizations (NGOs) such as Kiva http://www.kiva.org/ .

However, there are also microloan programs in developed countries, including the U.S., whose purpose is to fund small business startups by making loans in amounts of a few thousand to tens of thousands of dollars.

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Getting Money to Start My Business

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Your biggest business challenge this week: money to start my business idea

Capitalizing a new business is one of the largest challenges to overcome.

However, most entrepreneurs focus too much on this factor. They think that their business idea is so foolproof, all they need is some money to bring their idea to market and the business is guaranteed success.

In fact, that is very rarely the case.

Only one in 10 new businesses survives a decade. The failure rate is the highest in the early months and years.

Although a primary cause of business failure is often attributed to “lack of capital,” the real reason is that the failed businesses ran out of time. They ran out of time because most of the new businesses burned through their available money trying to figure out a viable, sustainable business model.

The moral of the story is, before you go seek capital for a new business, be sure you have a proven business model. Take your idea and make a prototype. Do some tests with real customers. Make some sales or get signed letters of commitment to purchase your product or service once you have it ready to sell.

The key to success in business is selling something people want to buy. That is true whether you are tying to start an enterprise B2B company or a local retail business. The only way to ensure that the money you are seeking is going to build a business that sells something people want to buy is to prove that idea before you invest the big amounts of money.

To accomplish that goal, one task I recommend, developed by Dr. Rob Adams, is the 100 Customers Test. Talk to 100 prospective customers first, before you do anything else. You will learn more talking to those customers that you will by obtaining and spending just about any amount of money in the early stages of your business.

Prove your idea and your business model first, then seek and inject capital to scale the business model.

If you need money to prove your business model, start by talking to 100 Customers first. That will cost little to nothing and will almost certainly guarantee that when you do build a business, it will be selling something people want to buy.

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Startup Funding

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To have enough money to start; I have a small amount

Answer:

The absolute best source of money is customers.

The more time you spend with your customers the more you will understand their needs and what they will pay for. If you provide a product or service people want to buy, you have instant cash flow and a proven business model.

A proven business model that has cash flow, and maybe even profits, is a lot easier to fund than an unproven idea.

If you don’t have enough existing capital to provide the initial product or service, then invest in market research—talking to and surveying customers—to document and prove market demand.

Proven market demand with survey results, web site tracking data, signed letters of intent or provisional purchase orders is a lot easier to fund than an unproven idea.

Some basics on funding:

If you don’t take in any external money and retain 100% of the company it’s called “bootstrapping.” Bootstrapping is a very viable option for many business models.

The biggest downside to bootstrapping is that it is extremely challenging to win a big market opportunity unless you take in external money.

The reality of bootstrapping is that it is very hard to build a business through profits alone, even in the best of times.

Most businesses need to take in external funding at some point in their life.

There are two basic types of external funding:

  • Non-Dilutive
  • Dilutive

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The Short Story on Pitches

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The short story on pitches is:

1.      The purpose of the pitch is to get the next meeting. This rule applies to everything from a 30 second elevator pitch to a one hour VC pitch. Note that the purpose is NOT to tell the entire story, especially about your technology, what you built and how it works.

2.      The most important things to talk about in a B2B business model pitch, in priority order:

a.      Relevant and target market size (see stage 1 at Idea to Exit)

b.      Market pain you are solving

c.      Sustainability of that pain (will the pain be around long enough for the company to grow into and be viable over the company’s life cycle)

d.      Level of that pain (who, specifically, is in pain, e.g. CEO, CxO, VP, director, manager, users)

e.      Price they will pay to solve that pain

f.       Recurring revenue aspects of that price

g.      Sales model (type [direct, channel, etc.], sales cycle, signing authority, # of functions you need to sell to, e.g. finance, CMO, IT, etc.)

h.      Distribution channel(s)

i.       Barriers to (competitive) entry (Intellectual Property (IP) rights (patents), proprietary sales/distribution channels, etc.)

j.       Everything else, especially the technology, what you built and how it works

 

Note that what you know the most about, have the most passion for, etc., is down at the bottom.

This is why most pitches fail.

Most startup guys come in and spend 99% of their time on their tech, what they built, how they built it and demoing what they built. That is, in the end, the least important thing when you are pitching.

The most important thing is the pain you are solving, the scale of that pain, the sustainability of that pain and who owns that pain.

The impact on pitching and funding are:

  • Large scale market (.5 – >billion dollar scale) = VC
  • Medium scale market (several hundred million) = Angel & Super Angel
  • Small scale market (<several hundred million) = bootstrap, Friends & Family

You can cover points a – f in less than 90 seconds. That’s enough time for an elevator pitch.

Remember, all you want them to do is follow you off the elevator. The point of the pitch is to get the next meeting.