Are you ready to seek outside funding for your startup? The question of timing when it comes to raising outside money is a key consideration for most startups. How do you know that outside investors will have sufficient interest in your product and significant confidence in you?How do you know that they will invest in your company?
In, other words, what are some telltale signs that your startup won’t get funded?
If you’re like most entrepreneurs, you thought of a great idea and either went out on your own or convinced one or two friends to join the ride and become co-founders. At this stage -- although it may seem premature -- you need to decide on your corporate structure, especially if you have business partners.
You also need to select a suitable structure based on your longer-term goals and to clearly define the ownership configuration. A competent corporate attorney is essential, as well. Once you have these things in place, you can get to work.
This phase of the company will typically be the bootstrapping one, where you are using your own resources to flesh-out the proof of concept on your product idea and even developing your first prototype or minimum viable product (MVP).
Many entrepreneurs will also do a friends and family round of financing to help the product concept gain maturity, and establish some initial customer traction before they seek outside financing from angel investors or venture capitalists (VCs).
This is a good idea. Raise friends and family funds as convertible debt, with a simple conversion discount based on the first round of outside financing.
Another recommendation: Find at least one outside advisor who has domain expertise in your market. This person can be a guide and sounding board for you. Such people are typically not founders of the company and are compensated with some type of equity package; they may even be early investors in the company.
Now . . . you’re ready to start the process for raising outside money. And here are the red flag signs that that won't happen.
1. You're finding it difficult to land investor meetings.
You can’t get investor meetings, or when you do -- because you had a friend ask her investor friend a favor -- they ask very few questions. This could be for several reasons.
- Lack of team credibility
- Lack of upfront networking with key investors
- Poor backchannel references
- Poor team reputation
- Targeting of the wrong investors
If you're facing this problem, you need to take a step back and see if you're actually ready for outside money.
There could also be a problem with your introductory marketing materials, such as the executive summary. The executive summary -- like a person’s resume -- is designed to get a meeting. That is its sole purpose. If you're trying to explain too much, or you fail to describe things sufficiently, you may not get the meeting.
2. Your target market is too small and growing slowly.
You may not recognize this issue unless you have done a thorough strategic plan, which looks closely at your market, target customers and competitive landscape. You need to listen to questions from prospective investors talking to you about this issue because most investors won’t tell you directly.
If you haven’t done a thorough situational analysis, which is part of a strategic planning process, prior to starting fundraising, you should stop the financing process until you can credibly demonstrate that you are addressing a potentially large and explosive growth market. Otherwise, angels and VCs won’t invest. All these people want explosive-growth potential.
3. You aren't gaining traction with your target audience.
Even if you are pre-revenue, you need to show some compelling customer interest in the product or service. Customers showing a willingness to evaluate the product can do this. If you have customer testimonials, or even better, a few compelling case studies, this will add to your credibility. Outside investors may also want to talk with customers or prospective key customers during the due diligence process. You need to go into the financing process with this in mind.
4. You don't land follow-up meetings.
This usually indicates that you are either targeting the wrong investors or there was no interest, typically due to one of the reasons described above. Before trying to raise money, develop a targeted list, and use your network to get meetings with the right investors.
The lack of a follow-up meeting may also indicate problems with your presentation or marketing materials. You need to structure things in such a way that you build interest over time in your offerings. You need to have follow-up time frames, which show progress toward your goals, and the accomplishment of key milestones. Investors want you to establish a track record with them.
5. You are nearing the end of your runway.
This is either an indication that you have poorly managed your funds or that there is insufficient interest in your company from the investors you’ve targeted. Investors don’t want to invest in companies that are mismanaged, and they don’t want to deal with people who are desperate. If they do, they are probably predators in the negotiation process, which is a type of investor you should avoid.
6. You haven't met key milestones.
Investors want to see you making progress toward your goals and keeping your commitments. If you have never set key milestones for your company, that's a big problem. If you have set goals and key milestones but have failed to meet them, that's a yellow, or possibly red, flag for investors.
The courting process can take a few months, and your chances of raising money from outside sources will be enhanced if you have planted seeds earlier with your target investors. It also helps if you've established a track record of meeting your milestones even before you start the formal process of raising funds. Regardless, you should be meeting milestones during the fund-raising process. If you don’t, you may have a problem.
7. You can't recruit top talent.
If you can’t recruit top people, then there is usually word on the street that you don’t have a very good company or that you’re going under.
8. You are experiencing a high level of attrition.
If you are losing people, especially key people, there is usually an internal discussion going on about the possibility of the company going under. You may have also hired a team that lacks the passion and resilience to get a startup off the ground. In either case, this is a big indication that you won’t be able to execute, and you won’t be able to get funded.
9. You can't succinctly articulate your unique selling proposition (USP).
This could either be a communication problem or a fundamental business problem. In either case, prospective investors won’t have an interest your company. They only want to invest in companies that have something unique, valuable and defensible over time.
10. You receive a lot of questions about your cap table.
This indicates that you have a poor capital structure for prospective investors or prior-round investors, which potential new investors will perceive as a problem. It is important that you have a clean cap table in early rounds of financing. A cap table is an analysis of the founders' and investors' percentage of ownership, equity dilution and value of equity in each round of investment.
It is also important that you don’t have deal terms in early stages of funding that will make it onerous for later stage investors to get involved.
Before attempting to raise any outside funding, make sure that your company is a suitable candidate to interest investors. If you have a suitable company and a compelling business model, next make sure that you have a communication and marketing plan, along with a targeted list of investors. Then you can kick off your fund-raising effort.
Utilize mentors, who will give you direct and unfiltered feedback, prior to approaching outside investors. This move will reduce or possibly eliminate a lot of lost time, frustration and grief.