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An expert is a person who has made all the mistakes that can be made
in a very narrow field.
– Niels Bohr
If I had to live my life again, I’d make the same mistakes, only sooner.
– Tallulah Bankhead
To avoid situations in which you might make mistakes may be the biggest mistake of all.
– Peter McWilliams
In our experience, here are the top mistakes made when seeking capital for projects and ventures. In a nutshell:
- Underestimate time commitment necessary for fund-raising
- Poor presentation skills
- Vague (insufficient detail) use-of-funds statements
- Poor understanding of cash flows and exit
- Not doing your homework on prospective investor partners (targeting the wrong audience)
- Being uncertain of your value (to the right target audience) or accepting the opinions of others as your own
- Ignoring outside feedback
#1. Underestimate time commitment necessary for fund-raising. With such a winning idea, team, and market, how hard could it be to raise needed capital? There are exceptions, of course (stories of hot-shots with a elevator pitch and a PowerPoint that hit it out of the ballpark on the first try), but in the current economy, most companies vastly underestimate the time commitment necessary to successfully complete a financing. We recommend that a company seeking equity financing budget between 500 and 1,000 work-hours to the capital-raising process, spread out over a 6-9 month time period. The key processes include:
- Honing and polishing the business plan, offering memorandum, and other company due diligence materials
- Developing a comprehensive, targeted prospective investor list (see mistake #2)
- Contacting this list within a “closing funnel” process, allowing time to respond to investor due diligence requests; and,
- Negotiating the transaction. Disagreements about valuation are the most common problem with early stage transactions, but can be side-stepped with the right tools.
To see how easily the time adds up, our experience is that only about half of prospective investors showing an initial interest in a transaction actually progress to engaged dialogue and due diligence questions. Only about 10% of this 25% actually progress to a bona fide offer of funds (preliminary terms), of which only a modest percentage actually consummate an investment transaction. So completing an early stage “risk capital” financing transaction requires, on average, contacting at least 100-200 pre-qualified prospective investors.
#2. Poor Presentation Skills. Far too often, investment discussions go astray because of lack of rapport and inadequate questions asked by Company management. Active investors across the risk spectrum (startup equity to secured debt) are literally inundated with investment opportunities, so companies must be prepared for this extreme “short attention span theatre”. It is not unusual for a principal at a high profile VC firm to review dozens of prospective investments every month. As such, it is imperative that your investment presentation be extraordinarily brisk, to the point, and delivered with flair (personal style such as a sense of humor can come in handy) and great enthusiasm. Do not let that enthusiasm blind you to your audience’s non-verbal signals, however, as you may be missing the opener to exactly the conversation that’s needed to overcome objections, confusion, or skepticism. If the key presenters on a management team do not have these skills, then our recommendation is to either invest immediately in professional presentation and public speaking coaching, or to replace company principals with more impressive presenters. It is that important. (See related article Top Three Mistakes when Presenting to Investor Partners, at in3inc.com/presentation_mistakes.html.)
#3. Vague Use-of-Funds Statement. Too often a young company will get stuck on the simple question, “How much money are you seeking and why?” More mature companies can present sober and credible use-of-funds forecasts based on multiple funding scenarios, built from “the bottom-up,” with specific revenue and costs estimates garnered from the company’s historical financials and from forward-looking surveying of vendors, salary bands, property leases, etc.
Our experience is that the most credible and impressive entrepreneurs will have a detailed scenario of Use-of-Funds presented with a willingness to discuss specifics without defensiveness. Angels and super-angels, in particular, like to use this topic to better understand how the management team sees this future scenario playing out, anticipated time horizons, management’s ability to respond to change, defend their numbers … but still keep an open mind about contingency plans, risk factors, and “what if” scenarios.
#4. Poor Understanding of Cash Flow and WIIFM. Profit matters. A lot. Even in most so-called “impact investments” or for the sake of sustainability, with social and environmental benefits. Totally obvious to you? Great! But, believe it or not, most entrepreneurs have a relatively strong grasp of the marketing and operational components of their business, but tend to be weak in projecting and communicating the specifics of how they actually make money. And by making money we mean generating liquidity, usually in the form of cash. Before an investor will place their own cash into a company, they must be reasonably certain that this cash will be transformed into a systems and infrastructure that will eventually (and sooner rather than later, from “quick turnaround” to “patient capital”) create much more cash than originally invested. Creating cash requires a rock-solid revenue and cost flow business model. Among others, key variables in the model include customer acquisition costs, pricing and gross margins, accounts receivables aging, realistic administrative costs, and taxation and depreciation. The better that a company understands and communicates these cash flow variables, the stronger and more credible will be the investment offering.
Further, the clearer the investor can see how they will benefit financially, the “what’s in it for me” (WIIFM) consideration, including their likely exit or partial exit, the more you will have their attention.
#5. Not Doing Your Homework. Why waste precious time and money contacting unqualified and inappropriate prospective investors? Before an investment offering is undertaken, a comprehensive prospective investor list must be created, and all of the investors on that list must be qualified as to track record of investing in financing stages (private, public, equity, subordinated debt, senior debt, etc.) and market sectors similar to the company in question, country (or countries), and size of the deal. Are they actively investing or just sitting on the sidelines? While there are always exceptions, contacting prospective investors that have not recently invested in a company “like yours” is, in our experience, almost invariably a losing proposition.
#6. Being Uncertain About Your Value (to the right audience). Capital-raising is a long and often arduous process that requires patience and persistence. As discussed above, the vast majority of investment presentations will result in some form of rejection. But in addition to rejection, the company will also receive — either solicited or unsolicited — advice and feedback on the “flaws” of their business. While feedback is sometimes valuable, it is critical to very carefully filter and evaluate this feedback before revising the business plan and presentation. By the time an investment offering is circulated, company management should be extraordinarily convinced and committed as to the validity and solidity of its plan. Be sure to measure all feedback, no matter how well-intentioned, against this conviction and commitment.
#7. Ignoring Outside Feedback. This is the opposite of #6, and just as accepting the views and opinions of others in place of your own, so too would it be a mistake to ignore the feedback you will receive from qualified sources. Do consider the source. Most investors won’t tell you why your opportunity isn’t for them – strangely, the unvarnished truth is rare and a standard response like “We’ll pass” or “Not in our space” is most common. But for those who understand your situation but also remain objective enough – and generous enough – to share their perceptions, by all means take advantage of learning all you can. You can decide to reserve judgment when hearing points of view that seem unique to that person or organization, and allow a pattern to emerge. If you hear the same feedback from multiple sources, then you would be wise to listen and adjust.
Raising money is a big challenge even under the best of circumstances. The pitfalls and hazards are everywhere, and the consequences of failure can be devastating, but so are the opportunities to learn and evolve into a more investible business. Focus on a capital campaign intensively for relatively short bursts then cycle back to building strength, value, and further proof points before returning to the well. Stake out your milestones with evidence of accomplishment and keep building relationships even when not actively raising money. Capital is like oxygen. Without sufficient oxygen, your venture will sputter along, ghasp, wheeze, and eventually stop (or be abandoned). With the consequences of failure so dire and the challenge so great, it only makes sense to seek out professional assistance to maximize your chances of financing success. That’s where In3 Group may be able to help. Contact us to discuss your situation.
- Highlights of 2017 “Climate Reckoning” at Harvard University
- Workshop: Social & Environmental Aspects of Fundraising at “Climate Reckoning” Conference (Harvard)
- Water, Soil, Heat and Carbon — the shift hits the fan
- Impact Investing reaching mainstream acceptance — will it outpace financial-only returns?
- Panel Discussion: food, water and climate change mitigation