Getting fit for fundraising

A recent blog by Fred Wilson resonated with me and motivated me to write my next blog. In his blog, Fred reflects on the decision by WeWork to postpone their listing and uses the term “hair on a deal” to describe when a deal has too many issues which ultimately kill the investment. The critical lesson for entrepreneurs he highlights is the importance of having your house in order before starting to raise capital.

At Rapid Innovation Group, we believe that companies need to be “investor ready” and fit to raise. The analogy that I used recently with a company was that if an inactive and overweight 40 something year old (guilty) declared that they were heading straight to the track to run a 5-minute mile this would be viewed incredulously. Why? Well, obviously, they are totally unprepared both physically and mentally to be successful. How could they achieve this goal? However, if the person said that they were starting on an 12 month programme with this as the end goal and that they were hiring a personal trainer with a background in track and field, a nutritionist, physiotherapist and a sports psychologist to help them achieve this goal, then you might view their declaration as viable. If this was further backed up by a plan divided into clear blocks with defined milestones which involved shedding excess weight, building the body strength required for the distance, and fine tuning their technique,  then you would start to believe further and might even contribute to their GoFundMepage.

 

Similarly, companies need to get fit before attempting to engage investors. We have developed an audit tool to help companies understand their investor readiness and to identify the gaps that need closing before beginning a fundraising process. This invariably requires the investment of time to bottom out the gaps. The amount of time required is a function of how much fitness work needs to be undertaken.

But as we all know, early stage companies tend not to have time on their side particularly when it comes to fundraising. So, you need to begin this process well in advance of starting your next fundraising.  You need to assess how far away from readiness you are and what you need to do to close the distance. You need to make sure that you have enough runaway to enable you to execute these tasks (remember running out of money is not a reason to support a raise). You also need to know what investors will expect at your stage and how much hair they can stomach. The key here is to begin your investor training/preparedness in sufficient time before you need to raise. This will make the period from investor engagement to deal closure run as efficiently and effectively as possible. Although this is no guarantee of success, it puts you in the optimum shape. As Abe Lincoln once said “give me six hours to chop down a tree and I will take four to sharpen the axe”.

To VC or not to VC

My colleague Aaron came in this morning having attended a TechHub event last night.

Wow, and I thought some of my ideas were bad.  Aaron gave us a long description of a series of ‘companies’ he’d met (I put that in inverted commas because I’d call most of them ‘ideas’) – and some of them were truly depressing, and only one did not evoke the question “but…why would you want to do that?”

Most depressing of all is that the majority of these people are looking for venture capital (VC) investment.  Now, I’ve looked through a lot of VC portfolios and worked with a number of the businesses of which they comprise, and I am always shocked by the quality of some of the investments – and it leaves me asking the question “how?”

In reality the answer is all too obvious: many ‘ideas’ chasing too much cheap capital, brought about by low central bank interest rates.  The sad fact is: most of these companies will fail.  Why?  Because a) they should never been offered investment in the first place, and b) the ‘entrepreneur’s’ motivation for taking investment is misguided.

The first problem I cannot solve – if investors make obviously poor investments, and have access to the money with which to do so, then it will continue to happen.  However, I’d rather that entrepreneurs’ energies were put towards creating useful outputs.

The first mistake is for an entrepreneur to take an idea then go out looking for VC investment in the misguided belief that it is the end-state they want to achieve.  It doesn’t exist to boost egos – it’s there to support company growth.  It is no more than the enabler.  Your idea may not even need VC investment – and let’s face it, it may not need the strings that a lot of modern VCs attach to their investments in order to de-risk them (although you could question why they’d need to do this if they, as an industry, hadn’t had their fingers burned making stupid investments in the past).

VC investments in London these days often constrict the very companies they are supposed to be helping through capital.  They use debt instruments and clauses to take over companies and make the entrepreneur do what the VC thinks is right.  Do entrepreneurs really need / want that?  The only time you should be taking VC investment is when you do not need it.  I was taught that lesson by a very impressive US entrepreneur called Tim Wallace.  You don’t need the money, but it will enable you to do things faster than without it.  At the end of the day, if you need something – you are going to get screwed.

A properly planned business will take account of the trials and tribulations it may face – ‘courses of action’ and ‘actions on’ – it will consider all possible options before piling around the local VC community boring the good investors to death with rubbish, or convincing the incompetent investors to part with (what is often) someone else’s cash.

Choose your customers

One of the topics I like to discuss with prospective RIG-ers at interview is what the first steps are that they would undertake to plan the demand generation (i.e. marketing) strategy for one of our typical earlier stage clients. I describe this ‘typical’ client as having the following characteristics:

  • A market ready B2B SaaS offering
  • One paying customer
  • A recent angel investment with the objective of driving sales and marketing

There are numerous mechanisms, processes, and strategies in planning the initial stages of an effective marketing effort for such a company. However, I try and guide the discussion to the central tenet of any successful plan – the fact that you need to begin by choosing your customer. This becomes remarkably obvious to the candidate when I tell them, but it is non-the-less a vital step in any marketing strategy.

The key of course, is how to invest limited resources to maximise chances of market traction. In order to do this, you want to sell your solution to an organisation which has:

  • A problem / opportunity which your product solves / enables them to exploit better or cheaper than alternatives
  • An awareness that this problem / opportunity exists
  • Available budget

Now you have chosen your customer, in which markets do you find them? What is the best way to reach them? How are you able to articulate your proposition in such a way that it is most compelling? How do you make it more compelling than going with a competitor, doing nothing at all or doing something in house? How should you price the solution and what is the anticipated return on investment? How do you navigate the complex sale?

Once you have found a way to do it, how you codify this process to drive both repeatability and visibility for the purposes of revenue predictability? What are the key hires and what can be done to ensure the optimal candidate is recruited and able to perform? When is more investment required? Would growth objectives be better met if partnerships were formed in certain areas? How are the best partners found and what management processes are needed to reduce the risks of failure?

These are all the challenges we not only advise our clients on, but actively execute for them, and they are all areas that I will cover in future posts.

At this stage in the interview, the candidates are always suitably fired up about our business!