Raising Start Up Capital - 8 Hurdles to Overcome
Ideas are a dime a dozen.
No barriers to entry - almost everyone can do it.
Can’t grow large enough.
There’s no way to get out of the investment.
It’s a good idea you’re not the right person.
Most angel investors are not partners.
You’re not prepared.
Not enough progress.
1. Ideas are a dime a dozen.
There’s a pretty big misconception many saddened entrepreneurs looking to raise money from angel investors realize - AFTER they spend a lot of time, effort, and aggravation getting there. Investors don’t pay for thinking. They pay for doing.
If you’re coming around with just the idea for a business you’re going to get almost nowhere. Even if you have a phenomenal plan that’s detailed and displays lots of credible evidence you’re not likely to get anywhere.
Of course there’s exceptions but they’re so incredibly infrequent. Very senior people leaving the corporate world can circulate a memo describing their new endeavor and possibly succeed. Inventors and scientists who have well thought out plans may succeed. BUT EVERYONE ELSE WON’T.
Unless you’re inventing something that is leaps ahead or yet undiscovered or undelivered (read: energy, biotech, science) ideas can be exciting - they can create interest - but you’re not going to get a check.
In most industries there’s an abundance of ideas and a lack of resources. Furthermore lots of great ideas run into a meat grinder of objections that have nothing to do with the idea but all about its distribution, market size, uniqueness, timing, cost, etc.
So, if you’re starting up a company and you’re not really doing it - but you’re long on thinking about and describing it - strike 1.
2. No barriers to entry - almost everyone can do it.
You know people will like what you can do. You perform as well, no even better than most people. You know you can grow that business - if only you could get the capital. Well if the only thing keeping you and every other resident in the world from starting is the capital - well - sorry - but you don’t have a business.
Uniqueness is a key characteristic investors will pay for. The more interesting and UNIQUE the more you’ll get. Very interesting but highly available won’t get you anywhere. So you have to demonstrate that unique elements in your attack, your business, will propel you to be a success. If you haven’t figured out what those are. Get that done before you waste a lot of time.
3. Can’t grow large enough.
Let’s say you can really build a business. Truly.
Now to get investors - have you thought about how large your startUp really does need to be to get angel investors to write a check? No? Well lots of startUps don’t think about that at all! Think about - it you’re pitching a service business - say a real estate broker or a unique consulting firm - how big are you growing it to - $5 million? - even $10 million? You’re not pitching you’re Arthur Anderson.
There’s two huge risks investors MUST discount your view - even if they believe you.
1. Success Discount - likelihood you’ll succeed. Anyone investing say 25%-50%
2. Size Discount - likelihood your forecast will be reached in the timeframes
So think about it. If you’re saying the company can get to $3M and be sold for $6M in five years, the investor is calculating say a 33% discount for possible failure, and a 20% discount for size & timing. What’s the new proceeds and timing after that math? $3.2M in 6 years.
Remember you can leave money in the bank at 7% for 7 years and double your money. And that’s safe. Who’s going to screw around with you for 4-5 times their money in 5-7 years. No way. Jose. The comparison in risk is astounding and the investment has to compensate for that compared to the safe harbor of a bank. So you need to be offering 5-10 times return to the angel investor to balance the extreme lopsidedness of risk.
So if you’re thinking you want to raise say $250k or even more from angels you have to see things structurally so they’ll stand up to investor scrutiny. If they’re going to get say, 7.5% of the fully diluted company and they’re looking for a 6x return (simple math) they need $1.5M of proceeds, meaning after they discount your success & size they need to END up at $20,000,000 sale. If their Discount is say 30% for forecast, and 20% for size you better be defining how you can sell the company for $40M when you reach your goals.
4. There’s no way to get out of the investment.
If you build a company there’s four finite dispositions.
1. the company dies.
2. you manage the company eventually seeking public funding as an IPO and liquidity.
3. You get acquired and liquidity.
4. You have little liquidity and investors can’t get their value out of the ongoing enterprise - although you could be paying ongoing, even large dividends - but we’ll ignore that (it’s a fantasy hypothetical).
Most companies today would pick #3 - Acquisition. And if that’s what you’re going to pitch - you need to identify whom might be interested in buying your company when you reach your stride. How could you partner with them as you grow - kinda like dating and then you get serious and they marry you. But you could have several dating partners and then get serious - upping the ante for those who continue to pursue.
Whatever you pick the angel investor has to believe they get their winnings from you succeeding at achieving that disposition. If you don’t know the answer or if they can’t see it or agree you got no way out.
5. It’s a good idea you’re not the right person.
The proper analogy here is college basketball. Men’s, women’s, makes no different it’s the same conclusion. You can be a real star on lots of college campuses playing basketball. Kick ASS! But when the conversion from passion to money is required most of the players are not part of the group that make the real dough. So what happens - some ungodly number of players don’t further implement what was a great thing to do until that point.
So what do you do if you really, really want to continue playing. You have to become or build a team that puts you in the right role. Maybe you need the top creative person, or even a CEO, or a CFO, Chief Scientist. Who cares! If you can’t get the idea off the ground within your sport and make into the majors you gotta figure out who can and get them to join you.
6. Most angel investors are not partners.
Lots of start ups seek out angels based upon their familiarity with the very business they’re starting. And in many cases they assume the potential start up angel investor is going to want to really dig in and help out in ways. Now you really don’t want the old coot around - but your pitching to what you’re assuming.
You’re WRONG. Most angel investors that can write a check don’t want to spend all their time helping you out. What they do want is for you to be very successful so that 1) they can brag and kinda hang around and 2) make a lot of money. They don’t want to really connect you and they don’t really want to work and they really don’t have any phenomenal expertise or insights to lend.
7. You’re not prepared.
You’re in front of the angel you’ve been stalking. You’re excited. You got them excited. And then things start to fall apart. How come?
Most businesses anyone would want to invest in have some level of complexity to get them going - if they didn’t everyone would start them. So when you’re conveying a lot of information you need props - you need people to be able to see what’s in your head and get it into theirs.
You need to know what you’re talking about too. You don’t need to know every tiny answer - but you do need to know almost all of the big ones and most of the small.
You need to know how may customers it takes to meet your forecast, where they are, what they buy now, how you’ll find those customers, and sell them at what price. You need to know the size of the market and how fast it’s growing and who the competition is, and where and what they sell, at what price. And there’s lots more you need to know.
So look - if you’re gonna pitch angel investors for your startup company - then you really have to know what the hell is going on. You have to be an expert and you have to let people know you’re an expert by demonstrating your knowledge. And you need to be right, and if wrong get corrected fast. Would you invest in a dummy?
8. Not enough progress.
Hey. Let’s make this easy. Say you dropped by and after we chit chatted a bit you started to pitch me about this business you were starting.
Now let’s say we talk for a ½ hour or so and I look interested. And you’re getting about done with the pitch. And I say “Well show me this gadget you’re going to make millions with.” And you tell me “I haven’t built it.” And I say ” Well you got a great team ready to work with you. Yes?” And You say “I have some ideas for people but no one yet.” And I say “You must have some people lined up to buy this. Don’t you?” And you say “No. Not yet - I really haven’t approached anyone yet.” And I say - “I have to get up early tomorrow. So let me think about this. Call me.” And you leave.
If you’ve got nothing going on in the physical world in which we live and feel and touch objects. Then unless all of the product is intellectual property (read: energy, biotech, science) - unfortunately - you’ve nothing going on and no reason for angel investors to invest in your startUp now. Would you?
Investors of all kinds, angel, venture capital, and even wall street love progress. Continual demonstrable, physical, impactful progress. Product progress, customer progress, testing progress, functionality progress, pr progress, everyone loves all kind of progress.
Trumpet progress. And if you don’t have enough notes - get going and get something done.