…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.” 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.
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
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. 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.
2. Not Scalable
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 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. 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.
4. Weak Sales, Marketing and 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 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. 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.
5. Failing to Understand Resource Requirements
In engineering circles there is the Stanforth Rule which 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.” 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. 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 and managing distribution channels, will help your cause. Remember it is their money even after they invest it in your company. 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.
One final piece of advice to increase your chances of raising money: Be so good you can’t be ignored.