Having Problems Raising Money for Your Business? A Mega Tip

A year or two ago I sat on the Board of the Small Business Council – this was a group of entrepreneurs, handpicked by the UK government to advise them and the Department of Trade & Industry on all things related to Startups, Entrepreneurs and Small Business.

We would meet regularly as a board, look at programs to stimulate small business, proposed laws and regulations, meeting with tens of venture capitalists, angel investors and private equity folks at a time, as well as other small business owners around the UK and Europe. My area of interest and where I spent most of my time and energy was being a part of the Small Business Investment Taskforce looking at funding for small business and the Angel/VC and Private Equity Communities. This whole experience was challenging, stimulating and the learning curve was hyper incredible – it was seriously a once in a life time opportunity and worth going back to the UK for (after it finished, I went back to the US…)

So what has this to do with you having problems raising money?

Well, one of the insights this extended group came up with and reinforced by a monumental survey they undertook for a few years (called The Big Survey) – was that there was “no shortage of cash for small business” and just so you know, part of this study and the research after included looking at the startup environment in other countries – Europe, Australia and the United States. Supposedly, this was true not just in the UK but in those countries too…

I’ll pause there because, if you have tried or are trying right now to raise money for your business, you may have just fallen off your chair. Get up and I’ll type it in again so it doesn’t get missed.

One conclusion they came to was … “There is no shortage of cash for small business (…and startups)”

Now, when they tried to tell me that as an entrepreneur that has gone through the hot and sweaty crucible of raising millions of dollars by giving pints of my blood, crying into my startup pillow late into the night, and gnashing my teeth in absolute frustration – I found myself sitting on the edge of my chair and arguing – “Are you kidding? When you’re starting a business – finding cash is next to impossible…” I yelled across the boardroom, purple faced, heart racing.

With urgings to sit back down and wondering if they should call Security, they calmed me down and spent the next two hours is whispering my disagreement…

Do you know what they showed me – and what I’ve since had reinforced by multiple conversations with CEOs and Startup junkies?

And this is worth slowing down for too….

There is not a shortage of cash for startups and small businesses – even in this economically challenged times….do you know where there’s a shortage?

…there’s s shortage of companies that are READY to receive an investment from an angel or venture capital investor.

What?

Yep – You may think your business is ready to get cash from an angel or a VC – but maybe, just maybe, it isn’t.

It may not be that Investors have all gone on vacation just when you are raising money – it may be that either you are not yet investment ready or, and these two points could be true too… either…

  1. There is a mismatch between where your business is versus what investors want to see or
  2. You aren’t communicating where you business is at in the right way for investors to digest and get comfortable with.

Now this is big stuff – because if these points are right – perhaps it isn’t that there are no investors around, or that cash has all dried up – maybe, just maybe, you need to think different (read: rethinking…) about how you pitch your business or (and this might be tougher to accept…) perhaps you need to make a little more progress in your business before you are ‘investment ready’. But having raised $5M+ with a business plan, a couple of people and a concept after the dot com bubble had already burst – in my view – it’s probably the former – you may need to re-examine and rethink HOW you are pitching your business to investors.

Are you ‘investment ready’?

And how should I do that Andrew?

That – dear Reader – will be an extended topic for yet another blog post…

Until next time – please consider joining my mailing list and I’ll send you blog posts as and when we have updates.

How did this post hit you? Any comments? Or Questions?

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Thanks!

Andrew

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Comments

  • John
    July 8, 2009

    Andrew,

    Your point that there is still a lot (some say too much) venture capital was echoed two days back in a NY Times article entitled “Venture Capitalists Look for a Return to the A B C’s” (http://www.nytimes.com/2009/07/07/technology/start-ups/07venture.html?_r=1&scp=1&sq=venture%20capital&st=cse). Alan Patricof is quoted as saying “I personally believe and I think the evidence proves that the venture industry has gotten too big, the funds have gotten too big”

    That was certainly my impression when founding a tech startup just after the dotcom bust myself. There was lots of capital floating around but most of it was looking for the big score — the next Google or Cisco — and willing to burn through 10-20 companies if one of them hit the big time.

    I think one of the consequences of that is that lots of entrepreneurs who would be quite content building a good business that suits a real if somewhat boring need find themselves pressured to explain how they could become the next Google or at least show it’s not an impossibility.

    A more attractive option would be capital that is seeking out solutions-oriented startups that meet a need but may not become Oracle or SAP.

    In your experience would you say that 80% of the capital available for startups is of the “next Google” variety or the solutions-oriented variety? As a former founder it is hard to tell whether my impression that it is 80% “the next Google” is due to sampling bias (those are the types of investors I happened to encounter) or whether that’s just the structure of the industry then and now.

    Interestingly toward the end of the article Marc Andreessen is quoted as saying his new fund will invest in very small amounts like $50K. The two factors cited are (a) lower cost to startup a software company these days and (b) acceptibility of a smaller exit (less than $100m).

    I’m wondering whether this mindset is still the exception. If there is a trend toward solutions-oriented investment with a smaller exit then I think some other obstacles await which I’d happy to comment on following your response…

    Thanks!
    John

  • July 8, 2009

    John

    You make some great points – it’s perhaps true that if you go for the VC ‘brands’ out there that they are looking for those big wins. OK – …let’s face it, all VCs – small and large, are ALL looking for the big win. So are you, so am I – that’s just life.

    VC partners can only manage a certain number of investments in companies before they are not doing it efficiently. That means they need to be selective and focus on those companies they believe will give them the return they need to keep their fund healthy. That’s true of all VCs but now consider the big boys with a lot of money to play with – they need to be efficient too and therefore they won’t consider an initial investment of less than $2-3m or perhaps an even larger amounts. Now, given the failure rate and their investor’s expectations – funds look for a decent multiple on their investment – sometimes 3 or 5 or more times their original stake. So consider, if you get a VC putting in let’s say $5M series A (i.e. the first round) then they also know they’ll probably go through another round or two of dilution. Now if they take 30% for that initial $5m stake, that 30% may dilute to much less so to get a return which keeps their fund in good shape, they’ll need the company valuation to be considerable. That’s where needing a company to not just grow, but grow significantly, comes in.

    So, as a fund raiser wanting to grow a good company but not another ‘Google’, what do you do?

    You don’t seek out the big brand VCs, with $1bn funds, and pitch them just a ‘good’ business – it’s not worth their time or yours, they’ll probably not invest. Alright, I’m sugar coating it – the absolutely and positively won’t invest – OK, now I can get all that hate mail from VCs saying “oh yes we would…” – No, you wouldn’t – be honest!

    So what you should consider doing if you want to grow a good business (but not an industry changing one…) is to look at the smaller, younger, more boutique VCs – and interestingly enough they are springing up even through the economic challenges. Also consider taking a look at Angel groups – i.e. Angels who invest en mass. And the other route I should probably mention is plain old bootstrapping – I don’t know what your business or concept is, but you may be able to get to revenue without involving either angels or VCs.

    In terms of the last part of your question – Andreessen is creating VC according to how he thinks it needs to be structured based on his own set of experiences – I don’t think he’s a ‘trend’ – I think he’s a person who believes he has value to bring to entrepreneurs and the cash to help them build great businesses. Thankfully I think he’s right! But it won’t be until 1000 Andreessens pop up and do it that way – that we can talk trend 😉

    All of the above is obviously my ‘take’ so I’m sure there are 100 or probably more likely, 1001 different points of view – so if you or others reading this have a different take – your comments would be great…hit that reply button just…there…at the bottom…Yes…there….go on…press it already…

    Andrew

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