Let’s talk about the “f” word. No, not that “f” word. Let’s talk about startup fundraising.
We’re living at an exciting time for startups and funding. For a long time, access to capital was restricted to the elite “in-crowds” in marquee cities like New York and Silicon Valley. If you didn’t live in one of those select few areas, you basically didn’t have a prayer of seeing a check from an angel or a VC.
But the tide has started to turn. Innovation can come from anywhere, and now, thanks to the Internet, the JOBS Act, and the rise of crowdfunding, so can startup funding. Even VC’s are getting wise to the fact that the best investments may not all come from the same zip code.
So now that we’re living in this brave new world of democracy in startup funding, the question is no longer, Can you raise funds? It’s, Should you raise funds? Is it the right move for your company and, if it is, then where the heck do you start?
Startup fundraising is a subject that’s close to our hearts here at Startups.co. It’s the first problem we set out to help Founders solve. And let’s just say we’ve seen our fair share of the good, the bad, and the ugly when it comes to startup fundraising.
Recently, Startups.co COO Elliot Schneier dropped in to talk about funding, joined by Due.com Founder Chalmers Brown. They share some common misconceptions they’ve seen about startup fundraising – and why it pays to be careful about the what, when, who, and how of your raise.
Before we get too into the weeds on the subject of startup fundraising, let’s start here: you don’t have to raise money for your startup. You might think you do you do. But you don’t.
This might seem like a weird place to start in a post about funding. But it’s something we at Startups feel very strongly about. Because of all the mistakes we’ve seen Founders make when it comes to raising money for their startup, there are two that stand out.
Number one: companies that try to raise before they’re ready; and
Number two: companies that try to raise when they have no business raising money at all.
It’s not hard to see why people feel like they have to raise money to move forward. For a long time now, venture capital has been at the center of the startup universe. Startup media these days is wall-to-wall coverage of who’s getting funded and who’s doing these mind-boggling multi-billion dollar raises. There’s a definite “Keeping Up with the Joneses” effect that takes hold – and if you ask us, the startup world is the worse for it.
We’ve written before about the need to change the narrative when it comes to how to start a company. For the purposes of this post, we’ll leave it here: venture capital is one way to fund a company. It’s one way. Not the way. There are all kinds of ways to build a company, from small business loans to friends and family raises to good old-fashioned sweat equity.
So before you commit to the long, hard slog of raising startup capital (and it is a long, hard slog) think hard about your goals for your company and how funding fits in. Make sure you’re raising capital for the right reasons – and not because you think it’s what you have to do. And, to quote the always insightful Donna Griffit, “Fundraising should not be a survival mechanism. Don’t fundraise because you’re about to starve.”
We have an entire team that specializes in helping Founders decide whether fundraising is right for them. Want to talk to one of our analysts about your company’s goals?
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Once you’re sure that raising capital is the right move for your company, the next hurdle to clear is being sure that you’re investing the time and resources to get the job done. And that’s another area that tends to trip Founders up.
“I think the challenge is people think [startup fundraising] is a magic bean,” says Elliot. “They think you just put an investment on there, then investors will come out of the woodwork.”
Too many Founders that fundraise seem to have this idea that they can just go about their business as usual. They think the funding piece will take care of itself. But nothing could be farther from the truth. Raising capital is a marketing project, and it takes a ton of strategy, preparation, and work to pull it off.
Need proof? Just look at the “funded” page of crowdfunding sites like Fundable. “Most of the deals you see funded are folks who doing cold outreach, engaging press, and really, really hustling their deal,” Elliot says.
Once you decide you need capital for your company, getting that capital becomes your job. And, like any job, you get out of fundraising what you put in. So make sure you’re ready to put in your absolute best.
As Founders, we sometimes suffer from a bit of tunnel vision. We get so caught up in what we’re trying to do and what we need from the people around us to make it happen, we forget to flip the script and think about what those people need from us.
That’s a particularly big trap when it comes to fundraising. Founders get so caught up in what’s in it for them, they forget to think about what’s in it for investors. And that’s a huge mistake.
“I think one of the challenges is understanding that these investors are making an investment,” says Elliot. “Whether it’s a VC or an angel, they are looking for a return.”
Investors are customers in your deal, every bit as much as users are customers for your product. Just as you cultivate radical empathy for your customers, you need that exact kind of radical empathy in your interactions with investors. And, like with customers, building that credibility and trust needs to start from day one.
One important way to cultivate radical empathy for your investors, says Elliot? Helping investors feel comfortable about what they’re getting into with you.
“Part of the pitch is the ability to ‘de-risk’ the deal for them, and help them understand in a very concise manner how this business will make money,” he says. “A startup investment is very different than an investment in real estate, or the stock market. Liquidity only occurs when there is a cash event.”
Startups are a gamble. Everyone knows that. But as a Founder playing the fundraising game, your job is to make investors feel like yours is the safest bet they can make.
Never forget that fundraising is a two-way exchange. If you want to get value, you have to give value back. Investors are looking for something from you. Make sure you show them that you have something to offer – and you’re ready to deliver.
Another common misconception around startup funding? Thinking of investors just as walking checkbooks. Too often, Founders lose sight of all the other ways an investor can help – or hurt – your startup.
“A common issue I see with early-stage startups is taking money from any investor without thinking too much about the long-term partnership,” says Chalmers. “The ideal investor is someone who not only has capital, but also has the experience or the network to help accelerate your startup in a way you could not do on your own.”
As useful as the right investor-partner can be, warns Elliot, there’s no such thing as a magic bullet. “VCs and angels will never be the golden ticket. They will make intros, or add a level of expertise in some cases. But I see too many budding Founders hoping that the investors will help them land the perfect partner, or somehow take an app viral. Basically what they’re hoping is that the investor will build their company for them.”
Investors can give capital, advice, connections. But there’s one thing they can’t do: build your company for you. At the end of the day, you’re still the one with the vision. And you’re still the one who’s responsible for making that vision a reality.
If anything, taking on investment increases the pressure to deliver. Once you take that money, you’re responsible for delivering on your promises – not just to your customers, not just to your team, but to a new class of stakeholders: your investors.
Which brings us to another reason that it pays to be picky about who you let in on your deal. Because along with the capital and the connections, there’s another thing startup investors bring to the table: opinions.
Some investors get more hands-on with their investments than others. But most investors are going to have opinions on how their money gets spent. And once you take their money, it becomes your job to listen to those opinions.
No amount of capital is worth giving up on your vision, or taking your company –your baby – in a direction that you’re not passionate about. So before anybody signs on the dotted line, make sure you and your would-be investors have compatible visions about where your company is headed. Your future self will thank you.
Startup fundraising is not a magic bean, and it’s not a silver bullet. It takes time, it takes effort, and it could be the best decision you ever make – or the worst. So if you’re thinking about fundraising, think really, really hard. And if you do decide to go for it, and you need some help, let us know. We’re here to help out any way we can.
Check out our Startups University course Fundraising Series Seed, featuring funding expert Jenny Lefcourt.
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