Most startup companies have the same goal: Get funded by a prestigious VC who can help them scale, offer valuable connections and send a signal that the company is a comer. But we all know that VCs, especially the big ones, pass on over 99 percent of the deals they see. So what’s the secret to getting funded?
I have invested in startups for the past 15 years and over that time I’ve seen thousands of company decks and have personally been pitched by hundreds of startups.
Luckily, a number of deals I have funded have gone on to raise big rounds from famous VCs.
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While there is no universal answer as to how a startup successfully closes a great funding round, below are seven issues that I’ve noticed always kill VC interest:
1. Not solving a real problem
Everyone thinks his or her startup solves a consumer pain point. However, ask yourself metaphorically if the pain point you solve is “aspirin level” or is it “morphine level?” Big VCs love to invest in businesses that solve morphine-level pain. Why? Because when pain is huge, it’s far likelier consumers will pay for the solution.
Businesses that solve minor inconveniences usually hit a brick wall when they try and monetise or scale and don’t usually get funded.
2. Targeting tiny markets
Given the huge risks in startup investing, I need to see that your startup can become a billion-dollar business. Yes, that’s billion with a capital B. If your target addressable market is in the nine digits, most big VCs will dismiss it as too small.
A R100 million exit, even though it sounds amazing, usually will not move the needle for a large fund that has billions to deploy. Big markets mean big dollars, so think BIG.
3. No technical talent
I see deck after deck proposing all types of mobile apps but many times the companies have no personnel who can actually program or code. This destroys credibility. Outsourcing or using technical consultants will not cut it.
If you don’t have a technical co-founder you’ve pretty much selected yourselves for extinction.
Do not try and raise money until you can credibly point to the person who is going to make the backend or technical magic happen.
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4. Under-estimating your competition
When I see that there are over four existing players in your space, or if you have chosen to compete with existing tech monsters (Facebook, Google, etc.), you better have a bulletproof story about why your business is different.
Compelling business models usually have very little real competition, because they are attacking the market creatively and doing something that hasn’t been done before. It can be much harder to get funded as a “me-too” business.
5. Overestimating your product
In Peter Thiel’s book Zero To One, he says that your product needs to be 10X better than whatever is currently out there to get breakaway traction. I agree. Anything less than 10X will not create consumer passion that is sticky and viral.
As a CEO of a technology company myself, I know that making something even 50 percent better is hard, so 10 times may sound crazy. But in our hyper-competitive economy, you need to come to market with something that is not only incrementally better if you want to get funded.
6. Relying on top-down analysis
All too often, I hear a pitch that says something like “our target market is X billion is size, and if we can get Y percent of it, we will be Z billion in revenue.” Nobody ever believes this top-down fluff, so just avoid it.
You have to have a bottom-up analysis that starts with the unit economics of your product and shows how you will get to the first million in sales.
That first million will be the hardest revenue you ever get, so if you can convince me that you will beat the odds and get there, it makes it far easier to believe your scaling story.
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7. Lack of passion
This may be the most important. Remember, in the end VCs are investing in people. No matter how much I like your product, if the CEO and team do not exude passion and confidence, I pass every time.
As someone who has founded and built businesses, I know every startup will face “going concern” risk at some point over the first year or two. Sometimes the only thing that keeps you going is passion and confidence. So make sure you believe your own story and that you really love your product, because everyone in the room can tell instantly.
If you avoid the pitfalls listed above, you will have a far greater chance of raising a round with a great VC.
This article was originally posted here on Entrepreneur.com.
Fitbit And Adidas Know Something That Venture Capital Doesn’t
Your startup might accelerate growth by forming a strategic partnership with established businesses — not just VCs.
The media would have you believe that securing venture capital support and funding is the epitome of “making it” in the startup world. But, leaving aside the influx of much-needed capital, what many fail to realise is that VC partners aren’t always a good strategic fit.
So, when Fitbit was looking to light a spark under its fledgling line of smartwatches earlier this year, it didn’t tap another VC. Instead, it turned to Adidas, the shoe and apparel giant known for reinventing itself.
The product – the Adidas-branded Fitbit Ionic – dropped at the end of March and seems to have reinvigorated interest in Fitbit’s Ionic model, which made its tepid debut last year.
Not only did Adidas lend financial support to Fitbit, but it also lent the smaller company the fashionable, influential fan base that Adidas has carefully cultivated in the past few years.
Even though the collaboration hasn’t yet propelled Fitbit past Apple in the smartwatch space, the lesson here is clear: Your startup might accelerate growth by forming a strategic partnership with bigger, established businesses — not just VCs — to access financial backing, mentorship and expert guidance.
The sum is greater than the parts
Companies across a wide range of industries, from technology and retail to media and telecommunications, are investing in startup partnerships. In 2014, Wells Fargo created its own startup incubator to nurture new clean-tech businesses in the marketplace. The incubator, known as IN2, has invested nearly $6 million in 20 companies since its inception.
In successful collaborations, the relationship is symbiotic, with many layers of engagement. We saw a successful example of this at the Ameren Accelerator in St. Louis. Rebate Bus, one of the startups in our 2017 cohort, used the investment and mentorship to get off the ground and scale growth.
During its accelerator phase, Rebate Bus received funding and mentorship and has since secured a partnership with a large company to run a 90-day trial. The large company, for its part, added Rebate Bus’s valuable new technology to its arsenal to stay competitive in the marketplace.
One unintended benefit was that Rebate Bus added five new jobs to the St. Louis market, as well.
In addition to providing financial support, collaborations with bigger companies provide an opportunity to tap into a deep well of knowledge and senior-level management expertise that only a more established brand can provide.
And, because the larger company will likely share a common mission with your startup, it will be concerned about more than just return on investment – something you can’t always say about a VC.
Cultivating a successful partnership
Just like any healthy relationship, this sort of collaboration won’t be successful without care and attention. Here are three ways to build and sustain successful relationships with larger companies.
1. Don’t use a partnership as a crutch. Business relationships are fragile. In fact, statistics from The Association of Strategic Alliance Professionals show that nearly half of business alliances fail. That’s why it’s extremely important to set relationships up for success from the outset.
One of the best ways to do this is to approach the partnership as only one facet of your overall strategy for your business’s growth, not its make-or-break point.
While corporations want to create an environment that spurs growth for everyone, they don’t want startups to become dependent on them. Show potential partners that you can stand on your own two feet and leverage a partnership to everyone’s benefit.
Related: The Foundations Of Growth
2. Don’t paint your partnership into a corner. So many venture-backed startups expect to see 12 years of growth in 12 months. These impossible expectations can hamstring a business partnership from day one. Instead, set time lines and goals with your potential partner that are specific and challenging, but also realistic.
Research from the American Psychological Association shows that setting these types of goals led to higher performance 90 percent of the time in the companies examined.
It’s critical to set these expectations early to ensure you and your partner are aligned from the start. The good news is that established companies whose sole purpose for a partnership isn’t ROI should be more open to realistic financial benchmarks.
3. Practice reciprocity. For startups seeking investment, landing capital can begin to feel like the endgame. But remember: Established companies are expecting something out of a partnership, too.
Older companies, meanwhile, are always looking for fresh perspectives; and startups usually have innovative ideas to contribute. It’s important to clearly communicate what each partner brings to the table.
Take the career-finding solution PathSource, for example. Co-founder and CEO Aaron Michel didn’t even consider partnering with a company that didn’t share PathSource’s goal to help people find better jobs. That’s why the company finally landed on a partnership with the GED Testing Service, the country’s high school equivalency testing administrator.
As Michel wrote in The Next Web: “A great relationship is a balance of give and take. When you approach a potential partner, don’t bother contacting them unless you know why they would want to speak with you. Know what you have to offer them.”
Legacy companies have a tremendous amount to contribute to entrepreneurs; often, these companies have even more to offer than a venture capital firm.
When both partners know what they want out of the relationship and know what they’re willing to give, the end result for both can be more lucrative than what each would reach on his or her own.
This article was originally posted here on Entrepreneur.com.
Is Your Business Ready To Be Funded?
A venture capitalist and an entrepreneur who has secured funding weigh in on what you need to become funding-ready.
1. Ability to Scale
According to Clive Butkow, CEO of VC firm, Kalon Venture Partners, there are many important criteria VC firms evaluate when making an investment decision, but the ability to scale is the most important.
“At Kalon Venture Partners we only invest in businesses if we believe we can make a 10X return on our investment when we exit the company. If we do not believe the business can scale, both in South Africa and globally, we will not invest,” he says.
“Scalability can swing an investor valuation discussion towards a ‘blue sky’ scenario, presenting an endless opportunity for revenue multiples on an initial capital cost-base,” agrees Benji Coetzee, founder and CEO of EmptyTrips.
“However, unless the potential is paired with execution capability it remains irrelevant,” she warns. “As a founder you need the perseverance and commitment to prove that your product will be scalable. In other words, you need to demonstrate your capability to replicate the offering to unlock upside, clients and product growth.”
2. Founder’s Mindset
“The founders and CEOs of businesses are the visionaries. They are the fuel in the engine and the Lieutenant General on the front line fighting fires. A founder’s attitude, resilience and ability to rally their troops is therefore paramount,” says Benji.
“Before a company can scale it needs to go through painful growing pains. The product evolves, customer orientation flips, the team matures and competition increases. To navigate this changing multi-faceted journey, the CEO is critical in the fight. Founders create the strategy, rally the army and lead the effort, in both the tough times and the victorious ones. Without a good fight-plan, and consistent implementation of it toward the objective, the company cannot scale.”
Clive agrees. “In my experience, what got you here will not necessarily get you there. Meaning the skills that helped you build a R10 million business are not the same required to build a R100 million business. Some founders either have the skills or are able to re-skill themselves and take the business to the next level, while others can’t. Sometimes the founder needs to be replaced with a professional CEO that can scale the business. This does not imply the founder leaves, but rather that they take on a new role that is more aligned with their strengths.”
3. Take Action
Clive doesn’t believe it’s right or wrong to scale a business – instead, it comes down to what the founder wants. “Many founders are happy to grow their businesses organically and maybe only build a lifestyle business,” he says.
“Other founders want to build a business that will change the world. We call these exponential entrepreneurs. The key to scaling a business, in my experience, is having the right skillset, as well as a mindset that embraces a ‘can do’ attitude and has a bias for action.”
“I call it AA or Attitude of Abundance,” says Benji. “Founders are the alphas. They need to lead, aspire to and believe in scale.”
You’ve Raised Early-Stage Funding! Now What?
Four ways to set yourself up for success with your new high-maintenance stakeholders.
I had 225 conversations and pitched 95 separate investors in order to raise my first $2.2 million. I remember applying for every possible pitch competition, attending every startup event and chamber meeting, tracking down every high net worth individual I could find – anyone willing to listen to my 30-second, 5-minute and hour-long presentations. It was a full-time job raising money, and it took me more than a year before the final investor closed.
But then, on that fateful spring day in 2012, the seed stage fundraise was complete. Then the real work began. It is one thing to paint a vision and promise a movement. It is entirely another to meet milestones, generate revenue, and keep the company on track for an exit. The one thing that I could have never prepared myself for was the pressure that I’d feel from the investors after the money had been raised.
If you are gearing up for a fund raise or are in the midst of one, you may think that you are undergoing the toughest part of your journey. And if you can prepare appropriately and build good habits early on, you will be.
Related: The Investor Sourcing Guide
Here are four tips for managing the investor’s expectations before you create cause for concern:
1. Communicate early, often and to everyone
When I first began interacting with investors, I made the (incorrect) assumption that they invested in me because they expected me to know what I was doing, and that they only wanted to hear from me if I had dividends to pay. This could not be further from the truth. As a (now) early-stage investor, I invest in businesses when I believe that 1) the founder has the passion and fortitude to stick with it through the tough times; 2) I have experience that can be helpful in propelling the business to first revenue, cash flow positive or exit; and 3) I will be engaged throughout the early days of the company.
To engage your investors, whether current or future, you want to be consistent and honest. If you are sending a prospective investor email and a current investor email each month, continue to send both. If you are undergoing a colossal failure or your burn rate has grown to three times what you had projected, your investors should be the first to know.
The biggest failure in building a relationship with your investors is not sharing everything that might affect them. An investor never wants to be surprised, but if you hit a wall, they would much rather hear the news from you and as quickly as possible.
2. Structure board meetings before you have a board
One way to structure communication formally and in a way that investors will appreciate is to schedule monthly board meetings before you have a formal board of directors. Invite all current investors to join this meeting/call, send an agenda in advance, and ensure that any items discussed during the meeting are followed upon in as timely a fashion as possible. Show your investors that you know how to work with them, value their time, and heed their direction.
Related: Is Venture Capital Right For You?
3. Engage your investors for assistance
I enjoy being engaged by my companies. If I have a connection that could be useful to a sale, additional investment or a decreased expense, I expect that you will ask me for an endorsement and introduction. If I have modeled financial projections for several previous companies, ask me for help in modeling yours (if relevant). If my home would serve as a great venue for a client dinner, ask me to host.
By engaging your investors for operational assistance, you build stronger champions for your vision, and empower them to better advocate on your behalf with the outside world. If they invested in your company, they have likely found personal and/or professional success themselves, and appreciate using their credibility to propel your company forward.
4. Know when to say “no”
Perhaps the most difficult lesson I learned in my early days of investor interaction was learning to differentiate when to heed investor advice and when to respectfully disagree. Your investors come from all walks of life and have varying motivations for involving themselves with your company – not all selfless. Often, you will receive guidance that does not agree with your business model, other valued opinions, or common sense. In these moments, it is important to voice your opinion, backed by evidence, to ensure that the direction you ultimately take is a sound one for the company.
Humility and coachability are important, but you raised the money because you know, inherently, something that others don’t. Be sure to use that experience of yours to guide your investors, and use their experience, where appropriate, in turn.
This article was originally posted here on Entrepreneur.com.
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