Michael Pazzani
Despite widespread fear that venture-capital investment would dry up, deal activity fell just 6% in the first half of 2020, compared with the same period of 2019.
One explanation for continued investor interest is that many great companies (Airbnb and Mailchimp for instance) have been launched during recessions.
According to Dick Costolo, Managing Partner ad 01 Advisors, “These moments of disruption can be the times when some of the very best companies are created because people have the impetus to give it a shot.”
If you are an entrepreneur preparing to raise capital, what are the keys to successfully navigating the current funding context?
There is a widespread belief among Founders that raising capital (particularly venture capital early in a company’s life cycle) is a precursor to building a successful organization.
- Determine how much money you need (and why)
Founders are often so concerned with raising money they forget to think about how much they SHOULD be asking for. Should you ask for enough capital to last you for years or only a few months? If you are raising equity (or hybrid forms of equity) the amount you ask for will impact how much of your Company you own. A really simple example: if you think your Company is worth a million dollars and you raise a million dollars of equity, you’ve just sold 50% of your Company. Are you willing to part with that?
A related question to think about: does your Company even need money right now? There is a widespread belief among Founders that raising capital (particularly venture capital early in a company’s life cycle) is a precursor to building a successful organization. While that can be true in certain circumstances, it also isn’t true in others. Consider Shopify, which is now a billion dollar public Company but was founded in 2004 as an online store for snowboarding equipment. Shopify grew independently and bootstrapped for 6 years before taking on institutional capital in a Series A round in 2010. In doing so, its founders increased Shopify’s value along the way and retained a far greater ownership of the Company had they raised money earlier. - Get your forecast in order
Investors want to know how they will make money, when they will make money, and how much money they will make. Showing an investor the financial answers to these questions will help move the ball forward quickly in discussions.
In addition, ensure your forecast also clearly shows how you intend on spending the capital you’re raising. If you’re spending money on engineering or development, make sure you also have remaining funds to market and sell your product or services when you’re ready to go to market. - Have “skin in the game”
If you are asking people to risk their money, you should be willing to risk your own money too. If you don’t have capital yourself to fund your business initially or to continue funding your business, it’s important to show investors you are 100% devoted to the business and can execute against your plan. In addition, having experienced co-founders or an executive team with skin in the game can increase investor confidence. Running a one person show? Build out an advisory board with some gravitas.
Planning on raising capital in 2021? Reach out to us at info@scalehouse.consulting if you’d like to talk more about your fundraising options (including financial prep!).