Bootcamp: Show Me the Money

"I am out here for you. You don't know what it's like to be ME out here for YOU. It is an up-at-dawn, pride-swallowing siege that I will never fully tell you about, ok?"
                                  -- Jerry Macguire

So, you all keep reading about how much money is floating around out there and how dysfunctional our business is becoming and yet, you are hitting wall after wall raising money. What the hell is going on? When is someone going to Show You the Money?

The Knife Edge: Here is the truth...raising venture capital is boolean. There is a knife's edge (pretty dull) and you either fall into the a) next New, New Thing bucket or b) "Yes, But" bucket. In the New, New Thing bucket, you are the market leader (or #2 or #3) in a hot space that is going to be worth $10B according to Gartner. Your analogs are getting snapped up for $600m by News Corp or maybe you go IPO. VC's are stumbling all over each other and you will likely raise too much money at a wacky valuation.

Yes But: Or, you are like vast majority of the real world, you are in the "Yes, But" bucket. This means, you start many of your presentations with "Yes, XYZ is in our space, BUT we have a better solution" or "Yes it is difficult to sell to municipalities, BUT we have a new, proprietary approach". In other words, you have a promising company in either a traditional or emerging space and while you are better than the incumbents/competitors, it is noisy and outside parties can't readily discern your market leadership. You have steak but no sizzle. To make matters worse, you are probably selling into markets that have traditionally spooked investors (municipalities, insurance co's, doctors, hospitals, manufacturing, etc).

Listen: So, what are investors going to do? They are going to look at your business. They are going to tell you that you have something promising and to stay in touch. And then, they will give you (if you are lucky) a handful of "issues" that need to be overcome. This could be showing that doctors in a region will adopt your service in mass or that insurance agents will use your tool (in numbers). In other words, they will give you milestones. Instead of ignoring these (because the VC doesn't understand your model), take them seriously. Creating a plan that allows you to start addressing these in a capital efficient manner.

Know yourself. Be prepared for this brick wall if:
1) a lot of the efforts before you ended up in the graveyard or scaled slowly
2) there are few large companies doing what you are trying (scalability)
3) there are large incumbents with predatory practices in your market
4) your customers are not easy to sell to
5) other efforts have had to raise significant sums to get to the finish line

Show Me the Money: How do you raise capital in these situations? Couple of ways:
1) strategic capital: if there are customers who love what you do, some may be willing to prepay for services or even invest in the firm
2) angels: friends, families, businessmen from the industry, etc who believe in what you do. Lock down on lead (say $500k+) and the rest come around.
3) placement agent: if you are raising enough money, institutional sources are possible. They will likely introduce you to the same hedge funds and venture capitalists that you would have gotten to. Don't expect any magic investors that are "unique". However, it saves you the time and effort of running the process. As my friend, Patrick Dealy say "spend your time making money vs. raising it".
4) sector focused funds: find VC's that have been active in the space. Look at firms in your general space and see which funds put capital into them (avoid those funding your competitors).

Patterns: So, realize that for the vast majority, this bubble isn't going to make your life any easier. It only applies to the funny money deals. It may mean that there are more angels coming out from under rocks (which is good). And, don't let it frustrate you. Realize that the investor business is about pattern recognition. If you look too much like something that was previously painful, it is hard to change opinion without proof points. Good Luck.

Comments

[Kedar]

Thanks for this posting. Could have saved me a lot of frustration if being there before 6 months. Now I understand these points. 101 of start up business as I think is show me money, then ask me more if u can get much more. Some of the companies (including some of DFJ companies) in my space, I look at them and wonder if they don't have revenue model yet how did they raise any money at all ?
But again, looking at others raising does not solve the problem.
Anyway, Thanks again.

[mbmccall]

As my caddie said after my 5th drive off the tee sideways (it was a bad day), "Sir, when you hit the ball, it's a mystery ain't it?" Lot of nuances and luck beyond the macro things discussed unfortunately...