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Tuesday, January 20, 2009

The 10 Best Ways To Improve Your Chances Of Securing Venture Funding

In my experience as a fund raiser, entrepreneur, consultant to entrepreneurs and adviser to VC's I have developed a good sense of the necessary actions and elements that lead to a high likelihood of a company obtaining investment capital. Obviously, there is no guarantee that a venture will get funded and there are ventures that get funded that make you wonder. The following list of action items will improve your chances of getting funded.

1.) In the Beginning
The process of raising funding starts well before you even have a twinkle in your eye or a thought in your mind about raising money to start a business. This early process is all about establishing useful future fund raising contacts by establishing a reputation as a trustworthy, ambitious, hardworking and knowledgeable individual. From the point and time you do start to seek funding the first thing you are going to do is rely on the people you believe can help you through the process. You do not want to be in a position of having to initiate the process of establishing useful contacts at the point that you decide to start a business. You want this pool to be as large and influential as possible before you begin. These people will become character references for you and potentially become direct sources of funding.

University And College Contacts -University and college connections are very powerful tools. Many of your friends and associates in school will go off and establish successful careers. In addition to being direct sources of funds they will have their own contacts that you want to have access too. Staying in touch with them and maintaining a good relationship with them makes good business sense. Stay in contact with these contacts. You do not want to contact them after 5 years of silence and ask them for help.

Alumni associations are rich in fund raising opportunities. Stay in touch through this mechanism and watch for updates of people you know. Reach out to them when an update does occur and congratulate them. A donation or two to the college or university does not hurt either. This will continue to reinforce your visibility within that community.

Family And Close Friend Contacts - The friend and family fund raising stage has become a bit of a cliche. I am not sure that raising money exclusively through this mechanism is the best idea for personal reasons but it is a great way to build a reputation and a referral network when the time comes to raise money.

Work Colleagues - If you have work experience this is the most effective network of contacts. The work place is really where you prove what you can do, how you react to business challenges and how you organize and execute tasks. Co-workers are the people that will best understand your professional qualifications to own and operate a business. They will have the best relevant direct connections and could be a source of team members for your new venture.

2.) Riding A Wave
Human beings are naturally herding creatures regardless of what an individual might say. Investors like to be part of something that is acknowledged as the new best thing. There is safety in numbers and large investments in a single area can actually create their own special energy and dynamic. Also, being part of a larger movement makes your venture easier to understand. Examples of waves are mobile applications, social networks, enterprise software, cloud computing, SaaS application platforms, clean and green, etc.

Define your product in terms of a current wave that investors are engaged in. Check out the portfolios of VC firms to determine a trend in recent investments. Also, look at long term trends that are ripe for growth and business development. For example, the impending government infrastructure investments are going to create an enormous opportunity for startups.

This is not to say that a business, service or product that falls out of one of these categories will not get funded. I have explicitly been told by investors that they will invest in anything they think will be a home run and they want to see as many plans as possible as long as it is within their expertise. However, their specialty focus is usually associated with an existing wave.

3.) Making A Wave
In addition to riding a wave you should also create your own wave. Getting you and your company out in the public eye under most circumstances will help you. One of the startup companies I have been advising is about to get national television coverage. This took a lot of effort and shear determination but I am sure that after the program is aired the company will have more funding offers then they know how to deal with.

Speaking Engagements - If you get a chance to speak at an event or conference go for it. Incorporate your company or product into the presentation. After your presentation mingle with the crowd and answer questions. This gives your product ideas or persona spin that will have some viral impact and will get the word out to a relevant audience.

Attending Conferences - Go to conferences that are related to your business and press the flesh. If there is a question and answer session raise your hand and introduce yourself. I can assure you that when the session is over or during a lunch there will be plenty of opportunities to network and to create some buzz about yourself and what you are doing.

MySpace, YouTube, Linkedin, Facebook, Websites, Blogs Etc. - Get you and or your product out on the Internet. Get some traffic that creates noise and recognition around what you are doing and who you are. These vehicles are great places to forward interested investors and it demonstrates that you know how to use the web for marketing and promotion. Make sure you have a way for people to contact you.

Publications - Not everyone is a born writer. However, if you have writing skills get published in journals, web zines, etc. Writing gives you an opportunity to demonstrate your organizational skills and to encapsulate your idea or business in a way that can be understood by a select or mass audience.

Stunts - TV and Radio coverage fall into the category of what marketing people call stunts. You engage is something unique or odd that attracts media attention. This is certainly a very bold approach. An example of this is the trend for people to conduct contests to find husbands or wives. I have seen several of these picked up by the media receiving national attention.

4.) Presentation/Pitch
I have been amazed by the poor quality and composition of some of the startup fund raising pitches I have reviewed. This is arguably the most important document you will create. Do not mess it up!! This document does not have to be big or verbose. It does need to be well organized, contain a mission statement, revenue sources, competitors, amount of funding you want, etc. It does not have to be over produced and beautiful. It does need to be run through a spelling and grammar verifier. It should not be boring and have redundant statements. It does need a closer or hook that you want to leave with the audience. Before you start distributing the pitch have a number of unbiased people look at it and provide their opinion.

5.) Business And Operational Details
You need to be armed with details of your business just in case. Show me the money is going to be the obvious question. Some of these details will be contained in your presentation. However, the presentation should not be filled with details. Have good answers for questions relating to budgets, staffing, marketing expenses, P/L, etc.

6.) Obtaining Advice And Changing The Model
You will start out with an idea, expectations and a plan. Before you venture out into a wider audience with your plan have some trusted individuals take a look at it. More often then not bouncing this first approach off of friends, experts and industry specialists will generate good critiques that you should take seriously. Reach out to some existing investors and professionals that you respect and get their feedback. Most people will welcome the opportunity and provide some great suggestions. Don't be afraid to change the plan based on their input. However, do not change it every time you get contrary advice. Use the critiques as a way of testing your assumptions. If you can't defend them then change the plan. If you can leave the plan alone.

7.) The Team
Investors are investing in you and your team as much if not more as in your plan. Individuals matter in startups. Each individual will have to be resourceful and multidisciplinary working on many different tasks. The team will have to turn on a dime and manage employees under difficult conditions. Startups have the odds stacked against them and the team will have to be exceptional for the business to be successful and thrive.

Investors want to know that your team is qualified to meet these challenges. When selecting a team make sure they have the expertise, background and connections required to instill investor confidence. This does not mean that everyone has to have years of experience. However, it does mean that your team must demonstrate the appropriate level of domain knowledge and have a history of success in that domain. You should ask yourself why me? What is it about me that is going to make an investor confident that I can do the job and run this company.

8.) The Prototype Or Beta Release
The current economic environment makes the development of a demonstrable product, web site, service, etc. important for funding. Unless you are a noted figure such as Meg Whitman, Mark Andreessen, Larry Page or Sergey Brin it is going to be difficult to get an idea funded. VC's are looking for a product example, an indication of consumer acceptance or a business partnership that demonstrates that the team can execute and there is some substance to the business.

9.) Business Partnership As A Source of Funding
I financed my first startup through corporate partnerships. I chose this route because the venture market was challenging (sound familiar) and I was initially approached by a company that wanted access to our technology. In addition to the first round I financed two subsequent rounds and sold the company in a buyout of one of the companies that funded us. This form of funding is not well promoted. I am not sure why. It is a great option for a number of reasons. Another business related to your business will have a better understanding of your value and will be able to utilize your product or service immediately. It may get you to market quicker. It instantly provides credibility for your company.

When you are developing your business plan also create a list of potential business partners. Speculate on how they might benefit from an integration of your product or service into their business. Approach them with a proposition. In my case I licensed the rights to a market sector to one of the partners. In exchange I received a significant amount of working capital to develop our product and to market it into other sectors. In another case we had already made significant inroads into a market. The partner wanted access to this market and used our company as a vehicle to sell our product and theirs as an integrated offering.

10.) Timing
Despite all of your efforts timing plays a big role in getting funding. Currently, getting funding is challenging. Early rounds are particularly difficult to obtain. B and C rounds are also hard to close. There could be a host of other reasons why you are not getting traction. Be objective. If there is a consistent reason for not getting funding and those appear to be timing related perhaps the best course is to wait it out. This is a very difficult decision for an entrepreneur. However, the time spent out of the hunt for funding should be used for other purposes. Additional product development, business deal commitments, attracting public attention to your cause can all be activities that may one day benefit your business when conditions change. The good news is that conditions do change. When they do be ready to go out in the market with your new and improved business plan.

Good Luck!!!!


manilaman said...

Very true.

Craig said...

The corporate partnership is an interesting approach. As you said, VCs will probably not fund an idea and need to see something tangible, does the same hold true for corporate partnerships?

Thanks for the great post

Kevin Flood said...

Corporations and businesses are more likely to fund an idea and early stage company. Another business will have a better understanding of your service and product and its sales potential. They will also have internal resources that can help in product development, sales and marketing.

Andrew Deal said...

great article. I feel we pass with a good score, now we just need to get the idea in front of the right people.

Edward said...

Here is a situation Kevin;

- Post the prototype, we talked to close to 100 vendors across the country and showcased the product. They were ready to use it.

- We have a tie-up with a leading bank. A few more are in the process.

- We tried to sell the rights for a specific region to an Corporate but something happened between the the lip and the cup.

- In this entire process, the product was ready and tested and as any startup, we ran out of money.

Any suggestions, other than going for another corporate partnership?

Dave888 said...

All very sound advice. We found seed funding from a player in the industry, who could understand the dynamics and rationale of the business (many VCs can't!). Pitching is important, but the confidence in the team is critical. Even the best ideas won't happen if the people are not seen to be capable of executing - find someone who has done it before.