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Raising Money - Hard But Not Impossible

Bob Creeden, Managing Director of the UVA LVG Seed Fund & New Ventures

Everyone who starts a company will need to raise money. Either it is accomplished the old fashioned way by generating sales and profits or by actually going to the market. Entrepreneurs, at some point in time, will be on the fund-raising circuit. The question is how can this be done successfully?

First of all, one needs to think of the effort as a campaign. Every campaign requires a fairly detailed plan including how much you need, who are appropriate contacts, how to contact them and what is the timing for the raise?    

Many considerations are in play when developing a campaign. I will address some of these considerations today and others in future newsletters. But first, get ready for a long and hard process. I tell entrepreneurs that the process is like peeling an onion. One layer begets another one, and another one, and you begin to wonder if the investor is ever going to stop their analysis and make a decision. This is mainly driven by the investor’s need to be very thorough in the diligence process as demanded by their investors. The best way to shorten the decision process is to help them by being prepared. 

Some factors that I consider as critical to your success in raising funds from any type of investor are as follows:

Discovery:  Discovery is your effort to focus on the identification and verification of the problem, while also making sure you have a deep understanding of your customer’s needs. I often ask whether the solution you are providing is a “nice to have” or a “need to have”?  Is this a real problem? This distinction is significant to investors, and it also impacts both the adoption of your solution and eventual success of the company. 

Much of what the potential investor will focus on is the market need, the customer and how your solution meets their needs better than anything else does or will. The best way to understand that – and to develop a solution they will buy - is to talk to your target customer. Make sure the problem you have identified is real for them and at a pain level that they will pay for it. Talk directly to them - call them, attend meetings where they hang out, use social media like Linked In and Facebook. Explore any means you can to get in front of them and do the primary research to really understand their need. Your investor is going to do this so you should too. 

You must then be able to translate that need into an economic calculation. Increasing productivity or quality are not reason enough. The buying decision is eventually reduced to an economic evaluation, so make sure you can communicate the “return on investment” for your customer.

This effort provides you with information to guide your development plan and ensure you are building a solution/product someone will buy.  It will influence the strategies and tactics to launch, price, sell and support your solution.  

Team: Lack of a qualified team is always cited as the major issue in early-stage investing. I happen to agree. However this issue is accompanied by the question of how to address it with first time entrepreneurs. Realize you can’t do it alone. Identify the skills your company needs to be successful. Understand the profile of the people you need, their background and experience, responsibilities going forward, how you plan to find, hire and compensate them. Show the investor that you understand the need to build the skillset to be successful and that you have a plan. Ask them for their help. 

Even before you get started, surround yourself with advisors who have experience building a company.  Reach out to folks who understand the market, have developed and brought solutions to market, raised money and most importantly, who will challenge you.  This advice will be invaluable as you develop your campaign and may bring connections to investors as well as potentially some reassurance.   

Funding NeedOne of the main mistakes I see is companies that do not raise enough funding, especially in the first round. Management is too often concerned about giving up too much ownership so they raise a smaller amount than they really need in an effort to conserve ownership. Bad strategy!! Be realistic about what you need, run a few “what if” scenarios because, believe me, things will not go as planned. By not raising enough capital, you put yourself in a position where you are stretching to achieve identified milestones that will cause an inflection in value. And, more often than not, you don’t achieve those significant milestones. Not only does this result in more difficulty for the next round of fundraising, but it will also have a negative effect on valuation goals.  And the difference in ownership for founders is minimal.

Recently, I was working with a company raising $800K and we did the “what do we really need” exercise and found it to be $1.5M. The difference for the two founders was 2.1% total ownership. This is a small variance and the additional funds will allow them to achieve significant milestones, which in the long run will be far more valuable than the 2.1% ownership difference. Do the math and see what it means for you – my bet is it will be more beneficial to get right amount of funding and give up a little more than the opposite position.  

These are just three of the many factors to work on as you develop and execute your fund raising campaign. Pay attention to these three and you can avoid unsuccessful efforts, lower valuations or a very lengthy process.

A final thought – raising funding is hard and we can help here at UVA LVG. Our staff is experienced in every aspect of commercialization, from the beginning disclosure to the ending fund raising efforts. Feel free to email or call me to talk about your funding needs.   

 It is hard but not impossible!!