Startup Fundraising: Entrepreneurial Blind Spots

The trouble with entrepreneurial fundraising is that it is an activity which most entrepreneurs will engage in only a few times and yet it has a massive impact on their startups. Unlike other, predominantly managerial, activities which are performed weekly if not daily, fundraising is relatively so infrequent that it is hard to build up a skill set and / or experience effectively.

The most important step is the first time you go raise money. This is not something you’ve done before, and you will be at a massive disadvantage as you will likely have never previously met with prospective investors. There are some great resources covering issues such as preparing the business plan, preparing the pitch, delivering the pitch, networking, etc.

There are, however, some important gaps which I will cover in this article.

You’re probably talking too much

Sales 101: Know your client (investor). How do you get to know your investor? Reading about them and asking about them is a good first step. But nothing beats asking them direct questions and listening to the answer.

Think about it: If you go to a 50 minute meeting and you’re busy pitching for 40 of those minutes, then at the end of the meeting who knows more about who? Of course the investor now knows a lot about you but you know little about the investor. Some might argue that this is what is needed to get an investment, but the truth is you need to make sure that the investor gets the information that they want, not the information that you think they want.

But if you spend enough time understanding the prospective investor, then you won’t have enough time to pitch. This brings me to my next point.

Don’t be an entrepreneurial spammer

Fundraising does not begin with a pitch. It does not even begin with a request for a meeting to pitch. This is the startup equivalent of a sales cold call. How many times do you get a call from someone you don’t know trying to sell you something and you actually listen to the whole sales pitch? Even if you do stay on the line until the salesperson finished, you’re usually doing it out of politeness. But you don’t actually buy anything. In the digital world the name for cold calls, or in this case unsolicited emails, is spam. Don’t be an entrepreneurial spammer.

You need to have a connection with your prospective investor before you can pitch them. It’s human nature, if they don’t know you they are less likely to invest in you. Also learn what the prospective investor is interested in. Not just about what sectors they invest in, but what their investment philosophy is, how their due diligence process works, what they find to be important.

The mating dance

The most likely scenario in which you will first try and develop a relationship with a prospective investor is some form of conference. Remember that you will be one of many trying to connect with the investor. I promise you that nobody can remember anything that is said if it is one interaction amongst dozens that happen in a single day. Instead your aim should be to try and set it up to maximize the probability that they will accept a one on one meeting with you subsequently.

Timing is everything. If you try to move too early, you will have to stand in line as the investor meets entrepreneur after entrepreneur. They will be dizzy. Wait too late and the investor will be exhausted or might have left early. Try to pick the right time somewhere in between and understand that the investor is there just for the initial connection.

Forget the elevator pitch on your company, instead have an elevator pitch about yourself that will tell the investor that you’re a serious entrepreneur. Then simply ask for their card so that you may meet with them and discuss your company in detail.

Your first meeting

The standard advice remains important: prepare by trying to understand as much as possible about the investor. Start off by asking questions confirming what you’ve learnt and clarifying what you might not know. There are a few other things though.

Entrepreneurs are also Investment Managers

Most pitches that I’ve seen concentrate on the company from a business perspective. What is the opportunity? What is the market size? Who are the competitors? This is all important but it is not enough. An investor is most interested in the risks and returns of the investment itself. Unfortunately the risks are usually a single slide of legalese presented as a disclaimer. Returns are also a single slide with a cap table and target returns. This is not enough.

You need to link the beautiful presentation on the business to how this relates to the investments risks and returns. And be sensible. There might be investors who believe you’ll give them an exit in three years, but remember that Souq took twelve years. Explain what happens to the investment if the business faces challenges. Part of the presentation needs to be less entrepreneur and more investment manager.

Investor Protection

The one thing that is rarely discussed is how investors will be protected. I suspect that this is partly due to investors being too embarrassed to ask and entrepreneurs not realizing how important the issue is.

I guarantee you that nearly every prospective investor is thinking “If I invest, how do I know that they won’t take my money and build out an expensive office?” With many funding rounds leaving founders as the majority shareholders, controlling the board and managing the company the usual corporate governance checks and balances no longer exist.

There is no single approach that I have seen, but it does mean carefully developing the shareholder agreement, including matters reserved to the external investors. Similarly, designing a board that reflects the majority shareholding of investors but incorporates enough governance, such as independent board members, is critical. This is not as sexy as talking about the new products or services, but it is a foundational block to successful fundraising.

Conclusions

Funding gains momentum once you’ve secured your first round or at least a few anchor investors. I’m not saying it gets easy, just that it gains momentum. To do that you need to not only learn about the conventional wisdom on fundraising. You also need to uncover what might be missing. Telling investors what you will do for them in addition to telling them how you will build your company is one such underrated issue. Similarly placing as much thought in designing investor protection as you do in designing your product or service will go a long way in moving you towards an investment allocation.


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