A deeper look into the statistics of fund raising for entrepreneurs
In an earlier post (How Bad is It?) I showed data indicating that only one applicant gets funded for every thousand executive summaries received by a VC firm. While that is absolutely true, it doesn’t tell the whole story.
Normal statistics assume that the objects the statistics deal with are interchangeable, but this is not the case with entrepreneurs. They range from wet-behind-the-ears newbies to serial entrepreneurs on their fourth start-up. The statistics don’t apply equally across this spectrum.
For starters, roughly 50% of start-ups are not fundable. They don’t have a business model that works, or they plan to introduce an OS to compete with Windows, or for any of a thousand other reasons they simply aren’t fundable. For them the statistics are not relevant.
So how come the other 49.9% don’t get funded? There are plenty of reasons. Here are some of the more common ones.
- This is the most frequent problem.
- Start-ups may apply to a firm that states on its website that it invests in early stage companies, but then learn that “early stage” means different things to different VCs. For one, it means beta software and a few users but for another it means two quarters of revenue.
- A little time will fix most too-early situations (if the time is spent getting more customers).
Approach wrong firms
- You would expect that “nobody” would approach a software VC firm with a medical device idea, but a lot do.
- More nuanced errors occur when an investor’s website says they invest in security software, but it fails to clarify if it’s network security, PC security or DRM.
- A lot of firms advertise themselves as “Bio-tech,” or an equally broad field, yet in practice have a much narrower focus.
- Know who you want to talk to; start by researching the VC’s website, examine their portfolio, check the background of the partners.
Insufficient growth plans
- VCs need their investments to grow unnaturally big and fast.
- Entrepreneurs with modest growth plans will find they don’t get much attention.
- How much is enough? A general rule of thumb is that $100M in revenue in five years is expected.
- Sometimes all it takes is to re-plan more aggressively.
- Some start-ups have been in business for five years, have built little customer base, have been searching for money in a lackluster manner. They simply aren’t attractive.
- Investors may feel if a start-up can’t build something reasonably big in four or five years there is probably something wrong with its idea or with the team.
- There is not much you can do to fix this one, but a lot you can do to avoid the problem.
Wrong introduction and presentation materials
- There is a right way and many wrong ways to create your executive summary.
- There are certain things investors look for and if s/he can’t find it quickly, it’s on to the next one.
- There is a right way and many wrong ways to create your investor pitch.
- There are certain things investors look for and if s/he doesn’t hear them, there’s no invitation back.
- Particularly for first-time entrepreneurs, getting some outside help can provide you with the right stuff, done the right way. Experience can be a good teacher, but can also be an unforgiving one.
Not likable (enough)
- Investors will work with you closely, apply a lot of pressure and depend on you to execute.
- They will want to feel that you listen and are coachable.
- A lot of tough times are in store, and they will be much easier to manage if you like each other.
- Investors like to invest in people they like.
Some little thing
- The rule of cockroaches is widely applied, if only unconsciously. It states, “There is never just one cockroach.”
- If an investor sees one problem — e.g., of logic, planning, or understanding, s/he is likely to conclude there is a serious risk that there will be other such problems that will be uncovered later. That is a real turn-off.
We will return to these themes in future posts, and go into ways to avoid problems, in future posts.