Starting up a business is something that many dream of doing but very few actually do successfully, often times simply due to the financial sacrifice required during the startup phase. In fact, nine out of 10 startups fail—nearly 30% simply because they run out of cash, according to CB Insights (http://bit.ly/1GO7yJ9). Unless you have enough money to self-fund your idea through the harrowing early days, you have to find people who have the cash and believe in you and your idea enough to part with it to make your business successful.
One thing every entrepreneur should know when considering raising outside money: Getting money is a full-time job in and of itself. It is time consuming. Developing your pitch deck; preparing your business model and financial plan; arranging numerous meetings; following up with each; and responding to questions are just a few of the steps in this process, and all distract from the most important thing you should be doing—driving revenue!
Determining the Right Time
So knowing that you will be distracted from building your business, how do you determine the right time? Examine where your models show you will be in 18 months without funding compared to where these models will show your company with funding. If the delta between the two data points is substantial enough to offset the dilution you will take, not to mention the challenges that can come with new investors, now is the right time. However, it is important to know what you’re walking into when looking for outside funding.
Investors spend all day talking to entrepreneurs who have the “most amazing new idea,” the “perfect business plan,” and entrepreneurs who are “going to change the world.” For everyone investors meet with, 100 entrepreneurs don’t even get in the door to pitch. For every 100 entrepreneurs that do get to pitch, 99 will not receive one dime of funding from outside investors. Bottom line, when walking into this environment, you’d better be prepared.
Like anything else, getting in the door to obtain funding starts with research, and similar to many things these days, the Internet is your best information source. First, identify investors who “play in your space” and then further investigate their funds details. Ask these questions: Who are the partners, principals, associates, and others who might be interested in what you’re doing and might get you in the door? How many degrees of separation are between you and them on your social networks? How big is the fund and do they typically invest the amount that you are seeking? This upfront investigative work is critical to avoid spinning your wheels and having great conversations with a fund that wants to invest $10M while you’re only looking for $2M.
So what are the different ways to fund your brilliant idea? As Dan and I have tried to answer this question ourselves as we sought funding for our startups, we describe some more common methods.
Self-Funding (aka, “bootstrapping”): While it is not possible for some people given financial requirements, it is the only way to ensure you keep the company ownership firmly in your hands. The beauty of bootstrapping: You are forced to focus on driving revenue—the highest priority for any startup! Funding levels here are only limited by the founders’ ability to fund.
Friends and Family: Getting money from friends and family is a scary thought for many. How many stories have you heard about families or friendships being torn apart over money? Two things you must communicate when approaching friends and family for investment dollars: First, it’s a substantial risk as most startups fail. A “sure thing” isn’t realistic. Second, friends and family must understand that just because they invest, it does not mean that they can tell you how to operate the business. If they insist on this as a term of their investment, it is best to look elsewhere. Typical friends and family round size: $10,000 to $500,000.
Crowdfunding: As one of the newer ways to fund a business, it’s gaining a lot of popularity lately in the crowd economy. It allows startups to raise money by pooling money from many small investors instead of finding a single source of investment. It essentially works like this: You post your business idea on a crowdfunding platform, such as Kickstarter or newer ones focused on healthcare and technology like MedStartr and Health Tech Hatch. You explain your plan to make money with your idea—and how much money you seek to raise. People will then “pledge” to either purchase the product or service ahead of time, or to get a small share of equity in the company through shares. It’s an interesting mechanism for Health IT startups that have a consumer-focused model as it may be an interesting way to help raise awareness for your product or service. Typical crowdfunding round size: $5,000 to $1,000,000 plus.
Angels: Don’t let the name fool you to into thinking these folks are the embodiment of winged kindness. Have you seen “Shark Tank?” These are savvy investors who invest in “seed stage” startups and launched ventures like Uber, WhatsApp, and Facebook. Healthcare accounted for 23% of Angel investing in 2015, and top healthcare Angels include Keiretsu Forum and Tech Coast Angels, according to the Angel Resource Institute Halo Report. Angels often look for large chunks of the company and likely have influence on company operations. Tread carefully. Typical funding: $25,000 to $500,000 plus.
Incubators and Accelerators: Both offer startups good opportunities early on to get help to quickly grow their business. An easy way to remember the differences between the two: Accelerators are like a greenhouse that help a young plant receive optimal conditions to grow, whereas Incubators match good seeds with good soil to promote growth. They often provide access to experts that startups typically cannot afford to employ on their own. These experts work with many different startups within the incubator/accelerator, essentially providing a fractional share of an expert to each, which is often all a startup needs. Excellent for Healthcare IT ventures. Typical funding: $20,000 to $50,000.
Venture Capital: Venture capital, or VC, is often the starting point for larger dollar investments. These often invest later in the game, after proof of concept—with some revenue coming in the door. VC firms have shorter-term horizons on their investments and want to see a clear exit strategy in place from the leadership team. Levels of investments from VC firms can vary. Some prefer to be part of a group making smaller investments of $100,000 plus, whereas others will fund fast growth companies that have a very clear exit strategy with $10,000,000 plus to further fuel growth.
Our Funding Experiences:
As we considered, and even began the process of raising funds for CancerActionNow.com, I learned three things:
- Every minute I spent seeking investors was time away from developing the business, which had its own “costs.”
- “Sales cures all” as Mark Cuban would say: As we began to generate revenue, the need for investment decreased significantly.
- There are other ways to get the intangibles that investors bring (i.e., connections and avenues for revenue growth). Don’t be afraid to use your network to find entrepreneurs or senior executives who will be happy to serve as advisors for your company for a fraction of the equity that an investment group requires. I formed an exceptional team that has already provided invaluable advice and contacts to advance our goals.
With RxVantage, we raised revenue from friends and family, angels, seed investors, and prominent venture firms. We learned a lot along the way:
- You’ll get a lot of “nos” before someone writes a check. Learn as much as you can from each one and keep moving forward. We raised our seed round in the depths of the financial crisis, so we learned this lesson especially well.
- You have to pick your investors wisely. Investors have reputations among entrepreneurs and you need to understand them as more than just a bag of money.
- Once you’ve picked the best investors for your business and your team, lean on them for their connections and their expertise. Many have been where you are and can help you avoid certain mistakes while at the same time, with a phone call, they can open doors that you could otherwise knock on for months.
So now you know it is time to raise money and know which path(s) to go down to do so. It’s a good idea to lean on those who have been through this process before—whether you know them or follow them online—to ensure your materials are up to par and your story is concise.
That said, don’t get too caught up in the details. You’re a passionate entrepreneur with an idea that may change the world someday—not someone who does what everyone else does. That is just as important to potential investors. Don’t show a hockey stick because “investors want to see a hockey stick.” Show it only if you have hockey stick metrics. Tell your story, tell it with passion, and have credible numbers to back it up—and let the chips fall where they may. Good luck!