Being strategic about when to raise capital is important, since a full-court investor press takes a huge amount of time and effort to do right. Fundraising essentially becomes a full time job, and can easily become a distraction for founders who should be focused on growing their businesses. I’ve seen worst-case scenarios in which the fundraising becomes so consuming that important business milestones slip, which then derails the fundraising—a dangerous spiral.
To try to bring some clarity and structure to the critical decision of when to raise capital, I have attempted to boil down the basics of what constitutes a “fundable” company in today’s market. In a nutshell, the main factors are:
1. The “Big Idea.” A good first filter is to honestly and objectively assess whether your startup is doing something truly novel. Novelty and originality are surprisingly rare traits; many startups are highly derivative– a slightly better mousetrap or an incremental improvement over what’s being done today (think: Groupon clones). While a better mousetrap can certainly be the basis for a profitable niche business, it is not usually venture fundable (or at least, not easily fundable—it becomes more so, with #3 below).
By contrast, pitching something truly unique, big, and audacious—what Mike Maples calls the “thunder lizard” startup—creates an entirely different response from investors. I’ve worked with startups doing something interesting but not game-changing, and I’ve worked with startups with ideas that seemed crazy—but if they worked, they’d be huge.
The latter situation is much preferred, and makes the tiring work of raising capital exponentially easier. A really cool technology with the “wow” factor or a big, audacious, disruptive concept is almost magical in the way it can cut through the noise and generate buzz amongst jaded investors. At a minimum, VCs will take a meeting to hear what the hell you’re talking about.
2. A Story, Well Told. While the Big Idea is the cornerstone of the foundation, the pitch is what gets people to stop and take a closer look. Investors are pitched by literally thousands of good companies each year; an outstanding pitch will break through the noise and set your company apart from the unwashed masses.
A solid pitch neatly packages the company, vision, and deal in a compelling manner (typically via your slide deck, exec sum, and model), with a narrative crafted to appeal to the nuances of what investors are looking for. It involves telling a clear and exceedingly simple story, so the message is frictionless and can be circulated among the partners at the VC firm and among other VCs in a syndicate. In other words, the pitch is portable (and often somewhat “viral”).
A solid pitch also includes polished and practiced Q&A, and an overall story that strikes both rational (how do I make a return on my investment?) and emotional (why do I want to be part of this vision?) chords. Bringing all these elements together is surprisingly difficult, but when done well it is a beautiful thing.
3. Supporting Evidence. This is the clincher, and the one most startups miss. VCs fund businesses, not concepts.