You have a great concept, a great team, and are prepared to quit your day job and do anything to get your startup off the ground. The problem is, not a single soul seems to be interested in investing in your startup. Maybe months have gone by without hearing back from a single angel, investor pools, incubators, accelerators, or precelerators. Your savings account may be dwindling down and the thought of forking over another $800 to the California Franchise Board to keep your company alive is making you cringe. What are you doing wrong? Here are some tips to help you diagnose your startup woes and try to get your startup back on track.
The Fundamentals. To raise money for your startup, you need to make sure you have the fundamentals down. The most common reason investors sour on startups is that the startup does not have the core characteristics that suggest probable viability of the business in the long-term. Think of it as ship-building – how will you convince investors that you are building a ship that will float (make money), with a reliable map (your business plan), survive the fury of the ocean (think Great Wave off Kanagawa), live through plague and vermin investigations (lawsuits, intellectual property disputes, California’s wage and hour laws, etc.), and safely land at a port to discover treasure and spices to haul back. There’s a lot of risk and the path to success is not guaranteed!
Taking a look at the fundamentals will force you to honestly evaluate: 1) whether you have a unique idea or improvement that will serve an underserved consumer area or market need; 2) whether the business is sustainable in the long term, and grow substantially through investments of capital, resources, labor, or time; 3) and is funded with enough money to break through to developing an initial service, platform prototype, or some other initial product that you can demonstrate to investors or begin selling to customers. For a longer discussion on these points, check out our “Help! My Startup is Going Nowhere” article. It is critical to make sure you have these fundamentals down before you go looking for investors and investments. Otherwise, you may end up running into a dead end and wondering how you got there.
Lack of Fluency with the Numbers. Aside from the fundamentals, the top challenge that founders often face in getting investor interest is a failure to have sufficient fluency with the numbers – referring to various metrics that investors generally want to know, for example, how much it costs to acquire customers, produce products/services, operate the business, and most importantly, how quickly investors can exit with a return on their investment. Among other important financials, you should be able to quickly, reliably, and confidently provide the following financials:
- Revenues since Inception. How much money has the startup made since its birth?
- Profits Per Annual Period. How much money is left over as profit (income minus expenses) per fiscal period.
- Profit Performance Over Time. What is the trend in profit over months or years? Are profits increasing, decreasing, or stagnant?
- Revenue Streams Per Product/Service. If your startup involves a variety of product lines, which are your most and least profitable and popular? The two may not always be the same.
- Customer Acquisition. How much money is required to acquire a single customer?
- Margins Per Product. What is the margin (rate of production versus rate of sale) per product?
- Revenue/Pricing Models. How does the business intend to make money.
- Real Estate. What is the price per square foot of sales (i.e., if your startup has a retail location, how much in sales is being generated per square foot of lease?)
- Debt. Does the startup have debt, like existing convertible notes, loans, or other debt instruments owed to anyone (including founders)?
- Salaries. What is the startup paying to its officer and key people?
- Non-Salary Income. How much in distributions (non-wage income) have been paid out and to whom?
- Financial Projections. Investors will also want to see how the business’s growth is projected over the next 3-5 years and how the business intends to meet those targets.
You should generally know these numbers cold and practicing/rehearsing delivery often and well enough to give investors comfort that you have studied every angle of the business and understand what it will take for the business to be profitable.
Being Seen and Heard. Raising money for a startup is like losing weight – you can’t wish the weight off, no matter how hard you try. It will take hard work over a period of many months and the same is true for investment rounds. Many startup founders overspend time soliciting investors from behind computers or online – this approach generally does not work. To make an impression on investors, you have to go to events regularly and look for opportunities to be seen and heard by investors, meeting them, and being enthusiastic about your startup and its activities. Successfully raising investor money is also like being a salesman, and entrepreneurs raising money should approach it like marketing and seek to grow relationships with 5-10 times the number of investors actually needed, with the understanding that the majority of discussions will not pan out for various reasons.
How Far to Go with Solicitation. While you are doing all your pitching, you should also be very careful about who you are pitching to and how. If you cross the line and violate state or federal laws in pitching your startup, your future as a successful entrepreneur will be over before it ever began. Before 2013, raising money for startups was much more difficult, but with the passing of the JOBS Act, entrepreneurs were given freedom to publicly advertise fundraising efforts for their businesses, which was previously illegal for the past 80 years. That being said, there are still limits. Private fundraising efforts must be geared towards accredited investors, and there are limits (up to 35) on how many non-accredited investors can participate. Public fundraising efforts, on the other hand, will require the investors to all be verified accredited investors. What’s the difference between private and public fundraising? Public fundraising consist of “public” advertisements or promotions, like internet posts, investment fundraising rounds on Angel.co, crowdfunding campaigns, and other older forms of public solicitation, like newspaper ads, commercials, billboards, or others. Generally, if you do not have a substantial pre-existing relationship with someone, it will likely be considered public advertising.
Should You Cold-Call or Send Email Blasts? The answer is almost always no. Pitches, or emails announcing that you are seeking funds, or worse – cold calls – should generally be avoided. Generally, you should try to meet the a person at the investment team, company, or other group that you are seeking funding from. The last thing you want to do is paper the entire city with your startup’s investment solicitations, and if you do it too often, then your startup may end up looking desperate and as though it is generating no interest.
Should You Hire an Advisor? Some startups bring on advisors to help build connections with potential investors. As much as your advisor may brag about all the people he/she knows in the industry, meeting your investors through an advisor is generally a bad way of getting introduced to the right people. Most investors hate receiving pitches from advisors or brokers. Think of employee candidate placement companies – they tend to be universally hated by both employers and employees because it rarely really matters to them whether there is a truly good fit. Their top priority is almost always doing everything it can to persuade the employer to hire the employee, even though it may be a terrible fit. Advisors/brokers can be the same, and on occasions, startup entrepreneurs can be left feeling as though they are being introduced to investors that aren’t a good fit for the startup, aren’t credible investors, or don’t have enough to contribute.
What’s the Investor’s Criteria? Another problem that founders tend to have is in seeking out the wrong kind of investor. Investors generally have experience in certain fields and areas, and tend to stick to what they know. If an investor or investor pool focuses on digital technology or mobile app development startups, then a green industries startup, no matter how promising, will probably not appeal to them. In this sense, researching potential investors, their backgrounds, their areas/fields of expertise, and their prior investments, will help you determine who will be a good match. Think of it like dating – you can’t be in such a hurry to get married that you marry the first person that comes along. It takes time and patience to find a good relationship. Your investors will be with you for a few years or much longer – learn as much about them as possible and pursue introductions with those who you think will be a good fit and understand your startup’s industry.
AXIS Legal Counsel has helped advise numerous entrepreneurs, founders, and business owners about starting their own businesess and dealing with legal issues that arise after the business has been formed. AXIS can assist with startup formations, contracts, deals, and transactions, business administration, corporate governance, operations, risk management /insurance, labor/employment matters, intellectual property, healthcare, crisis management, directors/officers,private/data security, technology, statutory/legal compliance, and business litigation. AXIS represents California and Delaware startups, Corporations, LLPs, LLCs, Partnerships,Small Business, Startups, and other business matters involving corporate law.
For information on retaining AXIS Legal Counsel to represent your startup or business in connection with any legal matter, contact email@example.com or call (213) 403-0130 for a confidential consultation. Axis’ managing attorney Rabeh Soofi is ranked as one of the “Top Women Lawyers of Southern California” by SuperLawyers Rising Stars, and represents businesses and start-ups throughout Los Angeles and California
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