Thursday, May 23, 2013

The Seven Deadly Sins of Early-Stage Funding Requests

In The Art of Bootstrapping Guy Kawasaki said, “The probability of an entrepreneur getting venture capital is the same as getting struck by lightning while standing at the bottom of a swimming pool on a sunny day.” And bootstrapping is a viable funding mechanism only if you have boots to strap, i.e., you have the ability to fund your venture with your own money.

For those of you in need of external funding, Kawasaki’s math is daunting. There is a rule of thumb that for every 500 bona fide business plans submitted to sophisticated investors, about 50 will get some consideration, five will become pitch decks seen by investors, and one will get funded.

So, what can you do to increase your chances of getting funded?

Other than being able to convince investors that you have the passion, persistence, and plan to be a successful entrepreneur, you should also avoid the following all-too-common mistakes:

1.     Not Being Coachable
Miles Kington said, “Knowledge is knowing a tomato is a fruit. Wisdom is knowing never to put one in a fruit salad.” Investors want to believe that you are smarter than they are; it is a big reason they will listen to your pitch. But wisdom only comes with the experiences learned over a lifetime. Good investors can help you in many ways beyond just financially, but only if you are willing to listen and learn. Have an open mind to the opinions of those who have done it before. Be the expert in the product or service you are creating, but defer to those who know the many other critical pitfalls you must avoid in order to be successful. 

I recently reviewed a pitch deck that had many grammatical mistakes. I told the entrepreneur that some investors might take that as a sign he lacks attention to detail. His email reply was dismissive and ungrateful. Investors are generally betting on the jockey not the horse, so being a horse’s ass won’t help you get funded.

And it doesn’t stop when you cash the check. Continue to develop a relationship with your investors even after they invest. Everyone needs a boss, even the CEO. Employ an effective Board of Directors that questions your assumptions. Every top golfer has a swing coach because they are always trying to get better. Follow that example.

2.     Not a Scalable Business
Your neighborhood may desperately need a new salad restaurant on Main Street and it might be profitable some day with solid execution. But borrow the money from a bank or raise it from the Three Fs of early-stage investing: friends, family, and fools. Early-stage capital is a high-risk investment and the best investors in the business are wrong more than 50 percent of the time. So the wins need to be big wins or the model doesn’t work. You must demonstrate that investors can make a substantial return and that is only possible if your business scales and scales quickly.

3.     No or Low Barriers to Entry
In the must-read book Do More Faster, Tim Ferriss said, “Trust me, your idea is worthless.” An idea is not a business. A company’s success is much more dependent on management’s ability to execute than on the original idea. That said, if six high school students in Bangalore can replicate your app over a weekend, your business is in trouble. Patents are a barrier to entry, but they cost money, take a long time, and don’t protect what you’ve done – they just give you the right to sue someone who has infringed on your patent. In my view, the best barriers to entry are revenue-generating customers, robust sales and distribution channels, a management team with deep domain experience, and the ability to continue to innovate rapidly. As Will Rogers said, “Even if you're on the right track, you'll get run over if you just sit there.”
4.     Weak Sales / Marketing / Distribution Channels
This is number four on my list, but number one in my heart. The single biggest weakness I see over and over again is a failure to understand how to build an awareness of your product, then an interest in it, and ultimately consumers willing to pay for it. “Social media” is not enough of an answer to the awareness challenge. “If you build it, they will come” only works in the movies to get folks interested. And the “App Store” similarly is not enough of an answer as your distribution channel since yours will be among the million or so already free or for sale there.

One way to jump start this process is with Eric Reis’ Lean Startup approach to a minimally viable product (MVP). Find a client to demo your MVP product or service. You won’t get paid, but you will get great feedback and, more importantly, a reference on which to attract distributors and resellers (and investors). If you are not ready for 10,000 customers then don’t sell direct – find a channel where you have 10 customers and each of them have thousands of customers.

5.     Failing to Understand Resource Requirements
In engineering circles there is the Stanforth Rule that states, “There are only two kinds of problems in the world: those that violate the laws of physics and those that time and money can solve.” President Kennedy knew in 1961 that with enough money and enough time, the United States could land a man to the moon and return him safely back to earth. But he didn’t advocate landing a man on the sun. You shouldn’t either. If your idea doesn’t violate the laws of physics, don’t be afraid to explain how much money you are going to need to raise to achieve escape velocity. The ability to articulate that you understand that $500,000 in seed capital will not be your last raise is actually a huge positive. Remember the Rule of Twos: It will likely take you twice as long to raise half as much as you are looking for – budget accordingly.

6.     Inappropriate Use of Funds
Certainly you are not going to tell an investor that the first thing you plan to do with his money is buy $6,000 office chairs for everyone in your company. But knowing specifically how the money will be spent is an absolute must. A plan to spend that scales the business faster and/or increases the team responsible for sales / marketing / managing distribution channels will help your cause. Remember it is their money even after they invest it in your company. If you want to raise more from them, or raise money from others who will ask them if you spent the last round responsibly, treat it like you are bootstrapping. Resource efficiency is the trademark of a true entrepreneur.

7.     A Revenue Model, but No Profit Model
I’ve got a great idea for a business that will generate explosive revenue from day one: I’m going to stand on a busy street corner and sell hundred dollar bills for $90. My forecast has me grossing $9 million the first quarter and all I need is $10 million to get it launched.


Again, an idea is not a business. Don’t tell us how much money you are going to bring in; explain to us how much profit you are going to be able to retain, reinvest, and distribute.

Although not one of the Seven Sins, Not Doing Something Useful probably should be. Marcus Wohlsen of Wired magazine said, “The history of technology is littered with solutions to non-existent problems.” Investors want and need to make money and that fact drives most of their decisions. But, speaking only for myself, building something more than just a cool new restaurant finder or the like would sure help you capture my interest.

One final piece of advice to increase your chances of raising money: Be so good you can’t be ignored.

Allen H. Kupetz is the COO of venVelo, a Winter Park early-stage investment fund, and the Executive-in-Residence at the Crummer Graduate School of Business at Rollins College. venVelo has recently invested in three central Florida companies: flexReceipts, Row Sham Bow, and Zentila.

Looking to learn more about how to be a successful entrepreneur? The author recommends these books:

Blank, Seven. (2005). The Four Steps to the Epiphany: Successful Strategies for Products that Win.

Blank, Steven and Dorf, Bob. (2012). The Startup Owner's Manual: The Step-By-Step Guide for Building a Great Company.

Cohen, David and Feld, Brad. (2010). Do More Faster: TechStars Lessons to Accelerate Your Startup.

Duhigg, Charles. (2012). The Power of Habit: Why We Do What We Do in Life and Business.

Dyer, Jeff and Christensen, Clayton. (2011). The Innovator's DNA: Mastering the Five Skills of Disruptive Innovators.

Freid, Jason and Hansson, David. (2010). Rework.

Guillebeau, Chris. (2012). The $100 Startup: Reinvent the Way You Make a Living, Do What You Love, and Create a New Future.

Johansson, Frans. (2012). The Click Moment: Seizing Opportunity in an Unpredictable World.

Kidder, David. (2013). The Startup Playbook: Secrets of the Fastest-Growing Startups from 42 Founders.

Lacy, Sarah. (2011). Brilliant, Crazy, Cocky: How the Top 1% of Entrepreneurs Profit from Global Chaos.

Moore, Geoffrey. (2002). Crossing the Chasm: Marketing and Selling Disruptive Products to Mainstream Customers.

Ries, Eric. (2011). The Lean Startup: How Today's Entrepreneurs Use Continuous Innovation to Create Radically Successful Businesses.

Tatum, Doug. (2008). No Man's Land: Where Growing Companies Fail.

Tjan, Anthony and Harrington, Richard. (2012). Heart, Smarts, Guts, and Luck: What It Takes to Be an Entrepreneur and Build a Great Business.

Wasserman, Noam. (2012). The Founder's Dilemmas: Anticipating and Avoiding the Pitfalls That Can Sink a Startup.