Most entrepreneurs, if they’ve raised capital, have struggled to raise at one point or another. Let’s face it, fundraising is HARD. You’re setting out for a task that you’ve probably never attempted before, reaching out to investors that you’ve never met or, if you’ve been building a good network, you’ve only met casually. Asking for money is uncomfortable for most people, even if it’s money for something in which you genuinely believe.
But, it’s not insurmountable. Thousands of people raise millions of dollars every year. In 2017, there were over 13,000 seed/angel deals done with an average value of around $1 million. If we dig further into the angel deal space, the deal size gets smaller. Nationally, Angel groups invest a median amount of just $120k per deal at an average pre-money valuation of $3.5M. It’s important to note that the deal size is typically much higher, it’s just that the contribution from angel groups isn’t the total investment. The takeaway here is that, if you’re looking to raise $500k or more, you probably won’t find that all from one angel group.
So, if you’re raising for the first time, here are some things to keep in mind:
It takes time
Maybe the most obvious point here, but entrepreneurs frequently underestimate the amount of time and energy required to raise capital. You can be so enamored with your idea that you are taken aback that every investor doesn’t jump at the chance to throw money at you. The platitudes are that raising capital is a full-time job (or can be) and that it will take six months or longer. The actual timeline is so unique that estimates and averages are almost worthless to the individual. The best advice on a timeline is to figure out your runway (how long can you last without cash), and that gives you your deadline. You have to raise before you’re broke. I would personally feel much better with an eight-month timeline than a two-month timeline.
You are more important than your idea
You and your team are far more important than the strength of your idea. Yes, ideas matter, but it’s in the execution that ideas become valuable. Overstating the importance of this is difficult. Investors look for entrepreneurs that can execute on those good ideas. If you cannot demonstrate your ability to build a team, create your product/service, sell to customers, build a user base, etc. your ideas are worthless.
Every entrepreneur thinks they can execute on their idea, the only way to prove this is to have experience in a previous company or to have traction.
Traction is the key to successful fundraising
Your ability to execute is proven by the traction you already have. So many entrepreneurs think they have to raise money right away, and some of them do, but raising before you have reasonable traction will kill your ability to find investors. If you’re trying to build an app that’s dependent on a large user base to be successful, but you’ve only developed a user base of 5,000 (and only 500 of them are active) you are far from proving anything. When you go to a potential investor, the familiar refrain is “come back when you have X number of users.” Why do they say that? They’re not trying to be difficult; they just want to see a demonstration of your ability to succeed.
This reality can be difficult for entrepreneurs and leads to a sort of chicken and egg problem. You need capital to build/market your product. Without that capital how will you get the traction that you need to prove your value to an investor? It is the fundamental challenge you’ll face early in the fundraising process. Entrepreneurs who want (or need) to raise cash before they’re ready will almost always fail. There are a handful of solutions here:
- If you’re fortunate, you’ll have the capital to personally grow the business to the point where you can raise an external round.
- Pre-seed or the “family, friends and fools” round. The implication being that those are the only people who would give you money.
- Bootstrap, the often overused term, really just means hustling to figure it out until you’re able to raise cash. Build your idea on the side, learn to code so you can build your app yourself, etc.
Some businesses never get funded
It’s common sense that you can fail at raising capital, but many entrepreneurs don’t want to go there. It’s important to think about your business from the investors perspective and ask “why would I invest in this company?” Removing the bias you have for the business you’re building is almost impossible, but it’s essential. It can help you learn when to give up and move on to the next idea.
References:
Chrunchbase Global VC Report: https://news.crunchbase.com/news/q4-2017-global-report-vc-sets-annual-records-back-strong-late-stage-results/
Halo Report: https://www.angelresourceinstitute.org/media/upload/full-report-2017haloreport.pdf
