Building The Right Machine: How To Raise Capital
When it comes to raising money for a startup, the CEO has their reputation on the line.
If they look stressed, it’s probably related to keeping their company financed.
It may not be fair, but if your company is raising capital, you’re the person everyone will judge based on the results. Which is why it pays to have a plan in place for getting the funding your company needs.
The best advice I’ve ever been given on fundraising strategy came from Amir Nashat, a partner at Polaris Partners. He told me to think of the process as a machine. And for any machine to operate smoothly, all the parts have to be in place before you turn it on.
He explained that at a public company, this machine is handled by an entire department. There are people who handle investor relations, PR, quarterly calls — there’s a system they can flip on at a moment’s notice. The engine roars to life, and within a few days, the company has raised the capital they need.
Unfortunately, most private companies don’t have departments devoted to fundraising.
But they can.
While you can’t just show up on an investor’s doorstep the moment you need money, you can set up a comprehensive approach to raise capital before you actually need it.
Here’s how to create that machine and keep it running:
Spend time on your relationships.
Building relationships that eventually lead to an investment starts well before asking for money.
You have to be proactive about connecting with people because other issues will always be at the forefront of your mind. When you’re running a business, your day-to-day life is about solving problems, managing your team, and keeping everything operating smoothly. These are happening by default.
No one is reminding you to build relationships with people who can help you raise capital. There aren’t any obvious signs.
You have to take it upon yourself to do the work, because those relationships may end up being the difference between getting funding and having to find a new job.
Think about it this way. When the difference between two companies is stark — one looks like a great opportunity, the other does not — it’s easy to know which will get funded. But when it’s less clear which company is the better bet, the relationships the leadership team have developed can easily end up being the deciding factor.
I know there’s only so much time in the day. You do still need to spend the requisite amount of time making sure your company is actually running well. But you have to find a balance that includes a substantial amount of relationship building as well.
I have seen it first had. When you have a trusting relationship, it’s not a complete arm’s length transaction. You can have a conversation, debate, and connect in personal ways.
Understand the habits and histories of your investors.
Just as you should always know your customer, it’s essential you know your investors and their tendencies.
Different investors look at the world in different ways. Some of them are all about investing in the newest, sexiest ventures. They like to gamble on concepts with a small chance of success, but huge potential returns. Others are more conservative and look for areas that are somewhat boring, but have a much greater chance at offering decent returns.
The point is, you may find that the decision to invest, or not, often has nothing to do with your business.
There are subtleties and nuances you need to look out for. Some people won’t invest in certain areas as a rule. But another investor may be open to being convinced.
Know it takes time and experience to understand how people think about these issues and recognize patterns in their investments. You have to study their past investments to understand how they think, and position your company to those most inclined to invest.
Always remember your “shadow” reference is what really matters.
These days, a quick Google search and a few clicks can tell you more about a person than the three references they send you.
References are meant to be glowing. These are people you’ve specifically chosen because you know they’ll say great things about you. The trouble is, everyone understands that by now. And they have plenty of opportunities to go online, ask around, and figure out who they’re really dealing with before they meet you.
That’s your “shadow” reference.
It includes all the blog posts, past ventures, and old associates an investor can dig up to get an idea of who you really are. Even though your industry may feel huge, you’re likely only a few degrees of separation away from anyone in particular. By the time they meet you, they almost certainly know you at some level.
So, be aware of this as you progress through your career and through funding rounds. Don’t go out of your way to make enemies, because you never know when their opinion of you might be more important than your references.
Figure out what makes you exceptional, and get ready to communicate it.
Investors are always triaging. They’re constantly winnowing down a set of opportunities to the most promising options.
If your company makes it onto their shortlist, then you need to be prepared to sell yourself and your business. Investors will take your company and categorize it. They’ll put you into a bucket with a handful of similar companies — and then tell you how much they’re willing to pay based on the average metrics of those companies.
Your job is to defy that categorization.
Essentially, you have to tell them why you are different. You have to convince them your company is going to be an outlier, so it makes no sense to use the average metrics.
At some level, that’s an emotional decision for the investor. There’s no way to know for sure, so they’re relying in part on their instinct.
The better you are at selling your company, the better the chance their gut will tell them to invest.
Remember what’s in your control and what isn’t.
There are so many ups and downs to the entire fundraising process, and you’re going to hear a lot of people telling you “no.”
You have to realize you can’t control other people’s decisions. A potential investor may have had a poor relationship with one of your board members several years ago, and it turns them off of your company. Another investor may have recently had a bad experience with a company similar to yours.
There’s nothing you can do about that.
Just focus on what you can control — creating your machine and performing regular upkeep on it.
If you can do that, your next fundraising experience will be much smoother.