6. How to get funding for your startup company - answering a viewer question

In this post, I want to answer a reader question. He said that he has been frustrated with his attempts to raise capital for his business and wants to know how he can get that initial funding. If you are more of a visual learner, the associated video is at the bottom of this post.

He spent the last year an a half trying to raise a tiny amount of pre-seed capital. He has done about fifty pitches, often to somewhat weak prospects. So far he has gotten nothing, and he is starting to wonder whether the fact that the business is a bit niche could be part of his problem. 

First off, I want to say that there is no magic bullet or formula that will absolutely get you funded. Every business, founder, and moment in time is different. However, I have seen patterns in the behaviors of many companies that hold them back. 

Based on his description of what he has tried, I suspect that he is not spending enough time on fundraising. Fundraising is incredibly time consuming. For most founders I have seen, that are doing it well, it is a full time job. Also, there is momentum to the process, so doing a pitch every now and then is not likely to work.

Entrepreneurs need to throw a very large net because the vast majority of potential investors are going to say no.This is a numbers game. Having a phenomenal pitch can substantially improve your odds, but even so the chances of success with any individual investor are tiny. The companies I see filling their rounds have contacted literally hundreds of potential investors, and continue to stay in contact with them over time. It is unlikely that all of these investors will be in your back yard, so you should expect to do a significant amount of travel during this process.

With such a huge number of possible investors, it is important to quickly qualify them before spending too much of your limited time talking with them. Many investors have a hard time saying no, because it is unpleasant, so they will continue to ask questions and drag the process along even though there is no real chance that they will say yes. Look for this pattern and cut them off, while leaving the door open.

It is more efficient to pitch multiple investors at once, and there are a number of places you can do so. Look for pitch events focused on companies at your stage and/or in your industry. Often these are open to the general public, but there are likely to be at least some accredited investors there. Additionally, presenting at these events gets the word out about your company.

Pitch contests are another way of getting in front of an interested audience, and winning at these events provides powerful social proof of the strength of your business plan. Any kind of award can and should be mentioned when reaching out to potential investors.

Angel groups are another great venue for getting in front of multiple investors. There are over 400 angel groups in the Angel Capital Association <https://www.angelcapitalassociation.org> and certainly many more unaffiliated groups. Most angel groups have an established application procedure and typically provide guidance on the types of companies, and levels of maturity, they are looking to see present.

Accelerators and incubators, in addition to helping you build your business, often provide introductions to investors or host events to showcase their cohorts of companies. They can be useful, but they are not magic money machines despite their PR.

An often overlooked approach is connecting with synergistic businesses, which can deliver multiple benefits, including funding. You can do business together, provide leads to each other, and share experiences and advice. If the other company is substantially larger, they can be a direct source of strategic investment, or even an acquirer at some point.

At some level, it all comes down to networking. While fundraising, indeed at all times while building your company, you need to be talking to anyone and everyone. Make the ask at every opportunity, not just for money but for help and referrals. You never know who might have the connection you need. My wife landed a connection to a well placed literary agent while talking about her book with the server at a winery during a tasting. This is not just good advice for fundraising, this is a general life lesson. Constantly let the world know what you need, not in a begging or entitled way, but just to allow people to help, which they generally like to do.

On the flip side of that same coin, take the opportunity to help out other entrepreneurs as well. Make introductions and facilitate connections. It will create stronger relationships and cement a positive reputation in the community.

One of the things that you should be asking for are advisors. In addition to advice and support, they provide credibility and connections. The fact that some well known and respected individual is a formal advisor for the company can open many doors.

If a founder is doing all that and still not getting funding, then there may be some problem with the business, the pitch, or the ask.

One problem is that you might be asking for the wrong amount of money, or looking for the wrong valuation. After talking with the person who asked this question, it became clear that they were actually asking for too little money. Their total ask for this round was $25k, which immediately set off alarm bells in my head. A typical pre-seed round is between $100k and $500k. It is very unlikely that a $25k investment will fund the company through any significant amount of growth, so there will be an almost immediate need to raise more. If that next round does not come through, then the investor loses everything. If it is delayed it puts the company over a barrel and may lead to unacceptable dilution of the investor. Also, constant fundraising is a huge distraction. The investor wants to see the founder get back to actually running the business rather than being a full time fundraiser.

I have seen many other businesses with completely unrealistic expectations. Sometimes they are asking for a couple of million dollars of capital at a a ten million dollar valuation based only on an idea. It is unlikely that any pitch is good enough to get funding for that deal. Big stories of astronomical valuations for famous companies lead many founders to overvalue their own businesses preventing any investments.

Angels want to see some significant groundwork in place before investing their money. There are many different things they look for, most of which are not absolutely required, but not having them makes the fund raising much more difficult. The key is to be able to demonstrate significant progress within the business prior to asking for funding. Even without market traction, there are numerous ways to demonstrate product innovation or novel distribution paths.

The gold standard is to have a fully completed product / service and paying customers. That is the ideal, although angels often invest in companies that are just starting to go to market, or have a late stage functional prototype.

Demonstrate the market need and acceptance of your offering. Revenues are the best way of showing that, but letters of intent, surveys, interviews, and the competition can also provide evidence. 

Show experimental evidence that your go to market plan will work. Will people click on your ads? Will they buy at your price (even if the product is not actually for sale yet)? Can you show that the economics work out?

Prove that the solution a big enough improvement over the alternatives. Can you show that the value of switching to this new solution worth the risk and switching costs for potential customers? Again, if your product is not completed, surveys and tests can provide some data.

Assemble a team of people with the skills needed to make this business successful? The team is incredibly important to the investors. In many cases they will bet on a good team, even if they think the plan is weak, knowing that they can find a way to adapt and make it work.

All of these elements contribute answering the two foundational questions for Investors. They are looking for the founder to make a strong case for two different things at once. First, they want a convincing argument that the opportunity is relatively low risk, with a clear path forward. Second, they also want to know that there is a likelihood of high returns. Go back and read to this blog for the reasons and details behind that. If your business or pitch is confusing or unfamiliar to the investor, it is exponentially harder to make these cases convincingly.

On the bright side, there is a huge herd mentality among investors. If you can land one or two with good reputations, many others are likely to follow behind them. But you need to get that first one.

It is also worth thinking about whether an equity investment is the right choice anyway. Equity is the most common approach discussed, but maybe debt would be a better option, particularly if you do only need $25-$50 thousand. There are numerous institutions that specialize in providing loans to startups at that kind of level. A good option is to look for Community Development Financial Institutions (CDFI), a list of which can be found here and here. These are local institutions, so you will need to find one in your area.

Doing all that and still no luck getting investors? It might be time to go back to the drawing board. Hearing no a lot in pitches is to be expected. Pitching and hearing maybe that never turns to yes is expected. But, if you are pitching and you are not getting anyone who is excited about your business, even while saying no, it is a very bad sign. In that case you may need to pivot, re-scope, re-examine your go to market plan, re-consider your revenue model, or re-think the pain-point or need you are trying to address. Much as founders hate to hear it, sometimes your business is just not going to work.

Unfortunately I don’t have a nice clean generalized answer to the question of why some fundraising effort is not working. Every business is different and the reasons for their difficulty vary dramatically. Often I can quickly point out several issues after only a brief examination of the business or pitch. However, unless you are lucky enough to be in a social circle with numerous high net worth individuals, who like and respect you, fundraising is going to be hard. The at bat percentage of companies looking for money is really bad. Fortunately you only need to get a couple of hits.

Help yourself by bringing your A game to these presentations, because the competition for investments is fierce. Weak slides, sloppy presentations, vague plans, or lack of progress will put you out of the race completely. Don’t trust your own opinion of your presentations either. Try them on friends, family, advisors, other founders, and anyone who’s opinion you trust and who can be counted on to actually tell you when your baby is ugly. Don’t pitch your key prospects till all those issues have been addressed. There is only one chance to make a good first impression. Open pitch events and contests are a great place for unbiased feedback and practice with low stakes. I created a video and blog on how to create and deliver presentations which may be of help.

Good luck with your fundraising and your business!

Till next time … Ciao!