Every time I remember my first meeting with an investor, I cannot stop laughing.
In the middle of 2015, two friends and I were working on our very first startup – Walkamole, a business that generated more than €80k in revenues in less than 6 months (the full story) – when we decided that, out of curiosity, we could talk to an investor just to “see what we could work out”.
And we actually managed to pitch to this famous and notorious Portuguese investor – he was one of the Shark Tank investors, and – truth be told – he had a great humor and he’s really an outstanding person.
There were us, pitching Walkamole to an investment board with at least 7 persons, trying to see whether they could “offer” us something interesting or not. We had absolutely no idea what we were doing.
Everything was going great, we’ve pitched our business well, the investment board seemed interested – we had some good signals of traction, that’s why – and at a certain point – the investor asks us:
“So, what are you guys looking for?”
And here’s when I disclose my brilliant 5-minute calculations made during the previous evening and tell him convincingly that we could work out an agreement in which the investor would give us €30k in exchange for…
Royalties for 5 to 10 years until the investor had generated a 10% return on his investment!
… seriously, royalties?… and a 10% return on investment?…
I know, it was terrible. But hey, it seemed like a plan.
I mean, interest rates are low nowadays, perhaps a 10% return on investment was already good for an investor. I feel embarrassed writing this.
And that way we wouldn’t open any equity of the business because we were absolutely sure that this was going to be something HUGE!
Well, this is basically when the investor tells me – and I’m literally quoting here:
“Oh, now you’re shoving a guacamole up our … !”
You see, we’ve done some of the coolest mistakes you can possibly do when you raise capital for the first time:
- We’ve addressed an investor at a wrong time, as we thought we had to grab this opportunity.
- We had no idea what investors are looking for and how the whole process of raising capital actually works.
- We didn’t want to offer any equity of the business because we’re absolutely convinced of our own greatness, as so many entrepreneurs typically are too.
Fast forwarding 1 year, I was working in a corporate venture capital firm and my role was interviewing and evaluating early stage startups to scout potential investment opportunities. Some of these entrepreneurs were still in the idea stage – 2 guys and 1 PowerPoint – and others were already presenting some healthy signals of traction.
So, as you can imagine, not only I know exactly what us – the investors – were looking for, I’ve also seen all the mistakes that entrepreneurs usually do – and many of them are shared with the mistakes I had done in the past, while I was running my first business.
Now, I’m not writing this article to lecture you on what to do to fundraise; my goal here is to share some thoughts on what’s stopping entrepreneurs from raising the capital they’re looking for.
At the end of the day, I am and I think I’ll always be an entrepreneur, and nothing gives me more pleasure than actually seeing other guys that are doing their best to create something outstanding.
So, let’s focus specifically on all those entrepreneurs out there that are dreaming of creating something huge that requires capital to scale fast.
Some of the questions that might cross your mind are:
- Is it even possible to raise capital? How could you ever be sure that you have what it takes?
- How can you find investors? For sure they don’t pop out of trees
- What’s the raising capital process like?
- And how do investors think? What are they looking for?
Are these some of the questions that have been holding you back? Do you feel like you’re blocked in the next stage of your startup because you don’t know which steps to take?
Well, first of all, let me tell you that I understand all of these doubts, and it sort of pisses me off to see the type of overwhelming advice you can find out there.
How are you supposed to feel more comfortable and confident about raising money for your brand new startup if some of the best advice you can find online, for example, are recommendations like:
- Hire great advisors! You need to learn from the best!
- Appoint experienced directors on the right seats!
- Get the right lead investor!
It raises many questions: what sort of brand new startup has the money to hire great advisors? Or appointing experienced directors? If you’re not even making money, how can you expect to pay salaries to experienced directors? And third, getting the right lead investor? But who’s a lead investor, in the first place?
I could go on, and on.
The truth is, these are important advice for guys trying to raise capital at later stages: when you already have a fully-operating business, you’re generating sales, and when you have been in the game for a while.
But if you’re just starting out with the development of your idea, you’ve just assembled your team, and you aren’t even incorporated, what you’re looking for is mentorship on which steps to take to disproportionally increase the odds of successfully raising capital, so you can, then, move forward with your business in a consistent way.
I’ve met a lot of people who are just starting out – I’ve been there myself – who are incredibly determined to succeed, and who are looking to take smart and important decisions to avoid feeling like they’ve been rejected by the investors and that their products will never thrive.
And, unfortunately, these are typically the people that suffer the most with the type of advice they find online because after jumping from blog to blog, you’ll only get confused with the terms used in the industry and you won’t ever realize what really moves the needle and what doesn’t.
You know, the Pareto Principle states: 20% of the things impact 80% of the outcome.
I feel like the big chunk of advice we see out there, and especially in the online world, is pointed at entrepreneurs with some sort of experience raising Seed, Series A or even later rounds, typically the guys who are already highly involved in the tech startup scene.
The type of terminology used tends to be very specific, and the advice is more often than not presumptuous, like 99% of entrepreneurs are just “too dumb” to understand what’s needed to raise money and those who get it are “Gods”.
We must be honest to ourselves: not everyone has access to entrepreneurial environments in which you have seminars with investors where you can perfectly understand what they’re looking for, the type of terminology they use, and ultimately where you can educate yourself about the subject of seeking investment.
For a lot of entrepreneurs, raising money is THE major bottleneck separating them from their dream lifestyle. So, if you can’t access investors; if you can’t ask them to help you or to evaluate your pitch; if you can’t get a mentor to guide you on the right and critical things to find investment, how can you get educated about the subject?
You know, it’s absolutely natural that you and so many people have no idea how to raise capital, and worst, that you feel blocked, in the first place, simply because you cannot see yourself raising money from an investor. Because you think they’re unreachable and that the bureaucracy and accountability required are for other types of entrepreneurs in a completely different “league”.
And here, when it comes to raising money, it seems like the picture painted is sort of similar: we’re trying to teach people on how to structure their pitch decks, how to calculate their company valuation, how to structure their company board, how to set up their governance system, when, in the reality, we have millions of entrepreneurs every year just GIVING UP on their ambitions, aspirations and dreams because there’s no one mentoring them on what really are the critical steps not only to raising money successfully and without getting burned out, but also to creating a remarkable business around a product that people are eager to buy.
I don’t know if you have already talked to any investor, if you’ve felt along the way that you’ve been rejected, or even if you felt like a “loser” because you’ve heard someone telling you that your idea stinks, and even advising you not wasting more of your time on it.
If any of those thoughts somehow crossed your mind, even once, let me tell you candidly that no one who’s trying to create something and have an impact on the society should ever feel like that, it’s simply not right, and for sure it isn’t fair. Believe me or not, we’re all dependent on the few and brave people that are willing to say out loud:
“This is who I am, and this is what I’m making”.
I’ll even quote myself (as someone liking his own post, I know…) to share with you what I’ve written in another post called “The Root of Entrepreneurship: Thinking Differently”:
“While the entire society will regularly kick these guys to be equal to everyone else, will criticize them, make fun and judge them, they will still be the ones who create the breakthroughs, and they’ll be the ones who push the human race forward.” – Because the people who are crazy enough to think they can change the world are the ones who do.
Very well, so now that we already know that it is perfectly OK and common not being well informed about raising capital, I’d like to share with you 4 thoughts about the subject that I hope will improve the way you see your business and the process of raising money.
#1: WHY I LOVE BOOTSTRAPPING AND YOU SHOULD TOO
Now, you’ll find curious to know that I’m currently launching a course on Raising Capital For Your Startup. So, your first question could be:
“Why are you telling us to bootstrap if you want to help with raising capital?”
Because at the end of the day, my interest is that you’re able to accomplish what really matters: creating an outstanding business, doing something you love, earning more income to live a richer life, and having your dream lifestyle. That’s all that matters to me.
So, to guarantee that I’m sharing all I know and what I truly believe will help you achieve these goals, I have to show you the right “tricks”.
And yes, the number one mistake that virtually all entrepreneurs do when raising capital is trying to raise it when it isn’t even needed.
First of all, for my newbies out there, bootstrapping means you create and grow a business only through your own capital or asking some friends and family relatives (warm circle) for a modest loan to help you kick starting your business.
Now, bootstrapping is probably the best way to build any business, mostly for two reasons:
- You will have all the time in the world to learn at your own pace, to experiment, to validate your concept and to get know-how about the startup and investments world, without having a rope around your neck. This is important: you cannot forget that raising external capital means a relationship with an investor, it is like a marriage, hopefully from 3 to 5 years – it won’t be for life, don’t worry, because the investor will eventually want to sell his participation around the 5-year mark.
- Because you won’t have much money, you’re forced to be creative and come up with a business model that is really Lean, which means that from the get-go you’re developing a hypothesis-driven mindset because you have to be rigorous on how you spend the capital you have. And I truly love this idea that you have to come up with non-expensive means to launch your business because it helps you focusing on what really matters: the 20% that move the needle. You’ll only work out the core features of your product, and you’re going to focus on sales as fast as possible to be able to scale your operations.
For example, in my 4-step framework to raising capital, the second step is called Squeeze your idea.
And, in short, it means that you should find a way to work on the end “package” or layout of your product, instead of investing time and money on developing something that people don’t want.
If you’re developing new software, you should first design the mockups of the final version of the software, so you can, first, gain traction through some customers’ pre-orders or even by having your customers funding your whole business.
You see, when you have cash ready to invest, this type of process will never cross your mind. You won’t feel the need to be creative and to narrow down your focus.
By the way, did you know that the vast majority of Fortune 500 companies were created with less than 10k$? That’s because a successful business doesn’t arise from the amount of money that you or anyone else invest in your business. The money cannot speed up the most crucial ingredient of all businesses that also applies in our own relationships: Trust. And trust takes time to be built, it doesn’t happen overnight.
I would always recommend you to pick a good source of motivation, starting small and walking baby steps. Do things manually to guarantee that you’re adding value to someone and that you’re creating a product or a brand that will be missed, if all of a sudden you’re out of a market.
And only then, when you already have customers trusting you, then you can think about scaling up. But if you do it before the right timing you’ll only focus on something that is really not your top priority and you can easily fall in the void between building a remarkable business and raising money.
And I definitely don’t want that to happen to you.
So, my humble advice: if you have money ready to invest, make sure you invest it in other financial applications and start a business with virtually no cash at all. Grow it organically, from the ground, customer by customer, as that’s definitely the right formula to creating something that is remarkable.
#2: Delaying fundraising doesn’t mean you won’t raise capital, it only means you’re doing it correctly
Now, if you recall what I’ve mentioned at the beginning of this article, I’ve told you that during my first startup we addressed this investor at the wrong time.
But what I didn’t tell you is that we’ve done it because we had someone referring us and we felt highly obliged not to miss this huge opportunity. Yet, we didn’t know what we were looking for.
And, you know, if you’re like me and you try to grab every single opportunity, from time to time you’ll face this dilemma of focusing on what you’re doing or shifting to something shiny and new that was thrown in your way.
Nevertheless, raising capital is and will always be seen as an excellent way to kick start any business. You know why? Because you’re finally able to pay yourself a salary, and for months, sometimes years, the founders don’t receive a dime.
As soon as you raise money, it will be guaranteed that you have a business, right? You’ll finally be on your way to creating your dream company and appearing as an up and coming star CEO on TechCrunch.
However, what I’m trying to tell you is that each step has a timeline, and the quality of a CEO will be dictated by your perception of what’s the perfect timing for each one of these steps. Doing things before the right time will only lead to dispersion of efforts, which ultimately generates inefficiency or the so-called “being stuck in the middle”.
My desire to you is that you have the capability to say NO we’re not going to raise capital YET because we’re still working on getting traction, and ONLY when we get our first 3 paying customers and we can clearly convey that our business has tremendous potential, THEN we’ll raise money to scale the operation.
I really know how hard it is to say NO to what seems like an excellent opportunity, our first thought tends to be “what if this never happens again?”.
And even if that’s the case, – which typically is not – the fact is, perhaps this is not the best moment for you to shift the course of your company.
Remember that each time you set a new course, there’s a learning curve, a small period of time in which everyone’s trying to figure out what exactly are they going to do before they can execute.
Frankly, it will be much easier for you to generate opportunities when you know it’s the right time for it and when you focus all your efforts on that. Effectiveness comes from focus; multi-tasking will lead you nowhere.
So, back to raising capital, it is really common to think that if you don’t raise capital you cannot possibly build a business.
And I understand it, perhaps you have a day job that takes a lot of time and you can’t find time to develop the product or sell it. But even in those cases when it seems virtually impossible to create a business without capital, just think about this: if you don’t present an investor with what he wants to see, you’ll never be able to find investment anyway.
So you better do it right, step by step, and make sure you have all the ingredients prepared, rather than jumping directly to the investors and hearing the same old “come back when you have traction”.
Also, the reason why you might want to delay the fundraising as much as possible is related to the benefits of bootstrapping. Ideally, you want to delay as much as possible the pressure of growing until you’re sure you know some key points about your business:
- Knowing the target market: what’s your customer profile? What are his burning pains and concerns?
- Knowing your business model: how do you make a profit?
- What’s your biggest bottleneck: what’s stopping you from growing further?
And naturally, until you have what we love to call “Traction”.
Which now leads us to the third idea I’d like to share with you.
3#: WHAT ARE EARLY-STAGE INVESTORS LOOKING FOR?
When it comes to this point, we can easily find hundreds of different opinions and I’m sure we could argue for years about the most important and decisive factor for an early stage startup to raise capital.
But before we discuss anything else, one thing we can be sure about: you need to have traction.
And by traction, we mean some sort of proof that your product is appealing to a lot of customers. You have multiple ways to show traction, from simple pre-orders intentions through 1-page websites and Google AdWords to having a customer funding your entire business.
By the end of the day, you want to have customers paying you. Period.
This is like the first metric you should definitely set for your business when it comes to reaching out to investors.
If you do not have people paying you for your product, don’t shift the course to raising capital, keep focused on generating traction.
Note: I know that business angels and some pre-revenue stage VCs can fund a business only with an idea but for that you’ll need the team traits we’re going to address now. Just have in mind that you should always guarantee, first, that you have traction because no one can argue with the results, while the team traits can be perceived by different people differently.
Now, the team traits.
And here they are:
- Commitment: first, you should only address investors when you’re sure that you’ve put all you have into that business for a while. And this typically happens through time or money. Investors want to see that you’re in it for the long cut and the big payoff. As a rule of thumb, if you’re just starting out, you should never reach out directly to an investor.
- Great Attitude: investors typically look for the opposite of what you’d imagine as a typical entrepreneur. I’m not sure if this is great, I just know that it is what it is. They’re looking for humble people (but highly ambitious, don’t confuse humility with ambition) who are passionate about what they do and have the flexibility to challenge their own assumptions and adapt if needed. Investors don’t really like that much of stubborn and obtuse guys. Which is interesting because that’s how we all tend to imagine entrepreneurs, right?
- Sales skills: this is a must, selling is not only important externally but also internally. A company growth derives almost uniquely from the capability of the founders to sell and influence other decision-makers. And, besides, people with selling traits tend to be more used to a denial, rejection and frustration, which is quite an important factor when growing a company because you’ll need resilience to keep pushing forward in the face of so many adversities and obstacles.
- Track record or experience: this one is unfair for first time entrepreneurs, but it’s probably the most important trait if you’re looking to fund your business in the idea stage. I’d say close to 100% of all business angels and pre-seed investors (pre-revenue) only invest in guys with PowerPoints if the founders have some previous experience related to entrepreneurship.
- Know-how mix: and finally, the know-how mix. Here, there isn’t much more to say than the fact that you need someone with managerial capabilities – basically, charting the course of the startup and having the capability to say “No, we’re not doing that” -, you also need someone with the core technical skill that your business needs – investors don’t like to see companies outsourcing their core business -, and then, someone with sales skills, for the reasons mentioned above.
4#: HOW DO YOU GET STARTED?
So now that we’ve talked about bootstrapping, delaying the fundraising as much as possible and the traits investors are looking for in any given business, I would like to wrap up by sharing with you some introductory hints when it comes to raising capital.
The first thing we need to understand is that raising capital, specifically from investors (business angels, venture capital or corporate venture capital), should only be a priority when all these three conditions are met:
- The concept you’re trying to develop cannot be “squeezed” to a costless version
- You’re aiming at the world with a through-the-roof ambition
- You’ll only be able to generate a profit when a lot of people are using the product
Having said this, let’s assume that your current startup falls into these 3 criteria. For example, a new type of a social media platform. Then:
The first step is to know your customers better than they know themselves.
I’m not expecting you to get out there and randomly ask people on the streets what they think about your product. Brainstorming; researching forums, amazon reviews, and essentially, thinking and discussing a lot with your partners, friends or whoever you think is the right person, is all it takes. Until you know this, there’s no business, so there’s no reason to raise money either.
The second step is starting with the end version by squeezing your idea. This is a MVP (Minimum Viable Product) 2.0. Instead of prototyping something, just avoid doing anything at all that consumes money and time – if possible. Design the package, the layout of your future version, and show it to customers. That’s all it takes to start generating traction – also known as revenues.
The third step is – naturally – getting traction. Once again, you should tell to yourself “until I have someone paying me in advance for this product, or clearly giving me a good indication that he loves the product, I won’t spend a minute to develop it”.
This is the type of rationale I’d like you to have: being strategic in your way of doing things and building your startup.
Focus on validating the idea first, test it through a 1-page website and Google AdWords, use Crowdfunding, get pre-orders, you name it. Do whatever it takes to have at least a few sound “YES!” before you start developing the product.
And fourth, imagining that you need a small amount of cash to getting started with your business and that it isn’t enough money to bother asking an investor, you have several ways that I like to call “Shortcuts to capital” that you can use to fund your startup for the initial months.
For example, bootstrapping is typically the best option. Crowdfunding is also another way – either through donations or equity – but definitely the best way is the so-called customer funding.
Basically, through subscription or drop-shipping models, or even by in-person negotiation to have your own customers funding your business – read this article on this subject.
And that’s it, guys, this is how I would get started building my startup that will later on raise capital. I wouldn’t like you to be overwhelmed by this, that’s why I’ve only mentioned the initial steps without diving in too much.
I know that some of the things mentioned here are not that appealing to the vast majority of us. Who likes to validate ideas? Who likes to talk to customers before getting busy developing the product? I get it, definitely, it seems like instead of going at the front, we’re slowing down and focusing on two aspects that are really tough. Truth be told, typically, no one likes to sell, it’s not easy, no one likes to face rejection.
I understand that what I’m encouraging you to do here is not easy, I haven’t always been able to do so either, but if you’re really, seriously, deeply committed to being successful and if you’re looking to take the right steps, one at a time, to create something remarkable, this is the recipe you want to follow.
Remember, twice the time invested in this stage will bring you disproportional results much later down the road.
If you’re looking to raise money or build a business that requires external capital, you might want to consider subscribing to Build Your Dream Company and downloading my Free 10-Step Quick Guide on How to Raise Money for the First Time. It’s a short 4-page guide that will pinpoint the major steps to building a remarkable business that requires external capital.
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