Over the past two decades, in addition to my own journey to raise capital, I have reviewed hundreds of business plans, sat in on countless board meetings, and reviewed outrageous “land-grab” opportunities. I’ve lived through the wishful thinking and half-truths entrepreneurs tell when they’re trying to raise capital and I’ve experienced what investors say to entrepreneurs and what they really mean after they leave.
The common denominator among those raising capital successfully has always been not only the entrepreneurs’ practical, pragmatic, and well-researched market opportunity, but also their ability to articulate a believable vision, and much more importantly, execute on the economic fundamentals.
With execution, performance, and results comes credibility, believability and trust – trust that encourages funders to invest initially and in subsequent rounds, as well as to introduce entrepreneurs to people who can help the venture exponentially reduce risk and accelerate its growth.
But first you have to find investors.
Raising capital or nurturing relationships?
Stick around the venture capital business long enough and you’ll hear every response to your plea for money imaginable.
- “You’re too early for us.”
- “You’re too late for us.”
- “Get a lead investor and then we’ll join.”
- “We don’t have experience in your industry.”
- “We have a conflict of interest.”
- “I liked your deal, but my partners didn’t.”
- “The timing isn’t good for us.”
Everything is a challenge in the life of an entrepreneur, and raising capital is no exception. Before you get started, it is critical first to understand that raising capital is never just about the money. Just as important is attracting, retaining, and growing a strategic relationship with a financial partner who develops a vested interest in the long-term viability and success of the brand called YOU!
Let me say that again – successful fundraising is about attracting, retaining and growing a candid, mutually respectful and trustworthy strategic relationship with an appropriate financial partner at the right stage in your personal and professional growth cycle!
How does this make undercapitalization an advantage? When you accept operating on a shoestring for the short term, you give yourself permission to focus on nurturing relationships, not just capital. You adopt a “crawl, walk, run” growth strategy that builds a solid foundation that can support your future growth. You begin to nurture relationships that will mature into tomorrow’s subsequent round investors. You raise scaffolding around your foundation on which to build a durable business.
Seek relationships with industry insiders
Each industry has its nuances. Most astute investors tend to “bet more on the jockey, and less on the horse.” That is not to say they know any less about the horse. They know the horse’s required training regimen and the ground conditions on which the jockey will ride that horse, hopefully to a strong finish. Because they know the horse so well, they develop a knack for identifying critical traits in jockeys that will get the absolute most out of the horse.
That’s why savvy investors tend to focus on a particular industry. Either through their own personal and professional experience—such as being a banker for 30-plus years—or by having made several investments in the particular industry, they understand industry nuances well. These are the people you need in your corner.
As your business matures through a natural evolution, it requires distinctly unique amounts and types of capital. Access to these sources also becomes a challenge, as many investors seldom accept “cold calls” or unsolicited offerings.
But if you approach with your ears open for sound counsel, vs. simply a handout for an investment, you might find knowledgeable mentors with expertise in your industry, willing to help you understand the nuances as investors see them.
With regard to your business, what are the top three industry nuances that an objective investor could consider to be a hindrance to success? How would you respond to allay each concern? What do you need to know to be able to respond with more authority and confidence? Seek strategic relationships with industry insiders who can build your knowledge and accelerate your ability to achieve your goals.
The gift of undercapitalization: frugality
If there is a positive aspect of being undercapitalized, it is that scarce resources create a frugal CEO. I’ve seen that externally funded, early-stage companies spend way more money than necessary. I see three consistent explanations for this phenomenon:
- Lack of the level of required expertise: They simply didn’t know what they didn’t know. They spent way too much money trying to learn or acquire the necessary expertise.
- Ignorance or bad counsel: it is critical to intimately understand the dynamics and nuances of your market; bad advice regarding a flawed strategy or inept execution can be a very expensive proposition.
- Misplaced comfort level of recent capital raise: because it is “someone else’s money” a CEO gets a false sense of security by having that money in his account to spend. What many entrepreneurs don’t understand is that they are stewards of that resource and need to carefully and consistently evaluate where and how they spend it.
Raising capital can be complex, expensive, and time consuming. Before you embark on the journey to raise capital, make peace with an undercapitalized early stage and turn your focus to nurturing the relationships that will lead to the external funding that takes you to the next level—when the time is right.
Then, when you are ready, be clear about the intended use of that capital and your desired outcome from the investment. Keep the lessons of your undercapitalized early stage: relationships matter more than capital, and the habit of frugality will serve you well for life.
1. Nurture strategic relationships before you raise capital. Successful fundraising requires a relationship with the right investor for each stage in a business’s lifecycle.
2. Build strategic relationships with insiders in your industry. They will increase your ability to calm investor’s concerns when you do seek capital.
3. Accept the gift of undercapitalization: frugality that prevents you from attempting to run before you can walk.