At this morning’s Seed Camp Tel Aviv, I was approached by a founder and found myself in a discussion of fundraising strategies. As we’ve all observed, there are some founders that seem to be able to raise money effortlessly and others that languish for months or even years before an investor finally decides to cut them a check.
After some reflection, I think there are five – largely orthogonal – elements that converge to create a successful financing strategy.
- Core attractiveness of the team/concept/market. There is no getting around this. Having discussed hundreds of start-ups with hundreds of other investors over the years, there is no doubt that some teams are seen as intrinsically better than others, some markets are intrinsically larger, and some ideas are intrinsically more compelling. This is the most important driver of the speed and difficulty of fundraising – but it’s not the subject of this post.
- Credible bootstrapping strategy. One of the most effective ways to shorten the fundraising odyssey is, perhaps ironically, to de-emphasize its importance by building a truly credible strategy to get by with less. It’s painfully obvious, but can’t be over-stated. The lower a company’s monthly-burn rate, the longer it can survive, and the higher its monthly revenues, the lower the burn rate. Some people call this “lean start-up” methodology, and my fund, Gemini Israel Funds, is a sponsor of the Lean Start-up Meet-up in Tel Aviv. Others call it bootstrapping. Most entrepreneurs that I know who are actually practicing this in reality just call it good business sense. My point is that companies that manage to keep their burn-rate at a minimum and present a credible bootstrapping plan are typically those companies that are able raise money faster. Why is this? Two reasons. First, bootstrapping offers real proof of management ability – which VCs love to see. Second, bootstrapping helps VCs realize that you may not need their money for a while, or ever – and that increases their motivation to act faster.
- Create a (genuine) sense of scarcity. For better or for worse, VCs are subject to psychological processes that affect their decision-making. Nothing is as attractive as scarcity and exclusivity. When a VC feels that he is seeing a business plan that everyone else in the world has seen and that the company is desperate for VC money, that’s less psychologically compelling than when a VC feels that he has access to a company that not everyone has seen and that may not need their money (or any money). This is often not rational, but it’s a real. An entrepreneur can create a feeling of scarcity in many ways: credible bootstrapping, emphasizing angels and existing investors over new investors, meeting VCs for advice instead of financing. Like anything else, don’t take this too far – and don’t fake it.
- Keep your business metrics ahead of your financing needs. I spoke recently to an entrepreneur that wanted to raise $2M for a company with very very early consumer traction on the web. By contrast, I met a team recently that has $2M in the bank and is seeking to raise an additional $2M to finance working capital on a signed commercial agreement worth up to $80M. Same check size, but vastly different stages. In other words, don’t tell a VC “if you fund it, I will built it, and they will come.” All three must happen simultaneously in in sync – development, market traction, and funding. Try not to raise more than you need or more than your market traction would justify in the eyes of an experienced investor.
- Love. The final element is also not rational, but it’s important. Lots of investments happen because an investor fell in love with a company, or – more often – a team. Obviously, you can’t control when an investor will fall in love – but you can take steps to increase the likelihood. Spend time with your potential investors, treat them like advisors, and share with them your challenges and how you are thinking about them.
The speed of your fundraising process is going to be a function of these five drivers. Understand them, try not to abuse them, and do what you can to leverage these elements to make your fundraising process less painful.