Is Your Startup Selling Painkillers or Vitamins?
And Other Questions Panelists from #FiresideChat Suggest Founders Should Consider Before Raising Capital
Questions Panelists from #FiresideChat Suggest Founders Should Consider Before Raising Capital
This week I was invited to participate in a #FiresideChat organized by Alysia Silberg, Co-Founder and COO of Acceleforce. The July 6th chat focused on the best practices to raising capital. Read a portion of the panel discussion below, and you can watch the entire fireside chat here.
This transcript has been slightly edited for clarity.
Alysia Silberg (@stepuptf): What questions should an entrepreneur ask themselves when they are considering a raise?
Earnest Sweat (@earnestsweat): There are a number of questions that an entrepreneur should look into before even considering a raise. The first question is ‘what type of capital should they bring in?’ I know they panelists have brought up the question ‘what stage are you at?’ kind of determines the answer to the first question. If you are pre-product looking to build a prototype — this is when you need to bring in what George called that “love money.” Once you move into post-product and are developing some micro-traction, if the product has high potential and you believe you have a team that has an unfair advantage to execute on this go-to-market strategy then you might want to look into venture capital and find the right seed investor. But once you’ve decided on what type of capital then it’s essential to find the right investor. The best entrepreneurs are motivated, passionate, and very self-aware in my opinion and so being able to determine what gaps you have within yourself as a founder, your founding team. This can help in prioritizing what type of investor you are looking to find. If you are very technical and product driven but need someone who can look from a 30,000 feet perspective and sell things then you want an investor who has an expertise, a network that can assist with that skill gap within your founding team. Those are few of the initial questions I would think about as an entrepreneur raising capital. I’ll stop there and let some of the other panelists provide you all with their perspectives.
George Vukotich (@gvukotich): Thanks, Earnest. Actually, you touched on something there. I think it’s very important — so often I run into entrepreneurs that are so busy selling their idea rather than listening to what other people want. I can’t tell you how many times they just talk about their great product or great idea that they’ve come up with, but they don’t even know if there is a marketplace for it. They create it, instead of getting out there. They need to get out there and test it. Identify some potential market segments, potential customer segments. Get out and talk to those people. Do they have any interest? Will they pay any more for what you are creating? That’s my litmus test. If someone will pay for what you are creating — great! If they won’t pay for what you are creating then it’s time to pivot and find something else. You know you have to come up with a minimum viable product as they say to start somewhere. But once you test it out, if there is no market for what you are creating you need to move on. Those are my thoughts.
Audra Shallal (@audrashallal): I just wanted to comment on what George was saying. I completely agree. Basically, for the entrepreneur they should determine are they selling painkillers or vitamins? I mean painkillers solve a real problem. We don’t want aspirin as investors, we want morphine. So the harder the problem the more people will pay for your solution. It’s also like would you care if your business plan was published? Well if you don’t care then you might have a business model that no one else knows how to implement or create. You might also have a patent that would prevent others from duplicating that exact business model. Another question is ‘how big is the pie?’ Investors want to see huge target markets. They want to believe that your business will rapidly become a multi-billion dollar business and that it will provide the large returns on investment. Just as Earnest was saying also, ‘can you prove your revenue model?’ ‘What are the bumps in the road and are you clearly addressing those pitfalls?’ And as we mentioned earlier, the management team — ‘are you a passionate entrepreneur and can you adapt?’ ‘Who do you know that will know what you don’t know?’ ‘Do you know who you know?’ Those are a few questions I think are important to consider.
Alan Silberberg (@ideagov): I think in addressing those pain points that you just brought up, it is very important for the CEO or the entrepreneur to be able to show their own vision in a very quick way. Everyone talks about the elevator pitch but really it is even less time than that. Because with social media and the type of digital media that we are all looking at today, people’s attention spans are so short. The idea of someone handing me a 3o page powerpoint and saying ‘hey let’s talk after you review that powerpoint’ — most likely they aren’t going to ever hear back from me because it’s like you have given me homework. What I’ve seen are the best sometimes are short pitches in the form of a video where the CEO or founder can articulate exactly what it is they are trying to achieve in 10 or 15 seconds. And then that short video is something that the entrepreneur uses as a door opener. Then they get the meeting and can present their business model/plan. But also to second what has been said here already, the passion really has to come out. Whether it is pharmaceuticals, widgets, cyber security, or you are building a drone, if you can’t be excited about it and be excited about why other people will be excited about your product too then it almost doesn’t matter how good the elevator pitch is. Because if they passion is not there then they both fall flat.
John Abeles (@drjabeles): Well I’m going to take a contrarian view to all of this. Maybe it’s my age. Maybe it’s my insights. I don’t know. But the other panelists have spoken about pitching and having an elevator pitch. And quick displays of passion to strangers. That’s the problem. It’s a very noisy place out there and you are trying to get a wedge into their attention span. Now that can be a very frustrating and unproductive way of raising capital. My way of doing things, as I said before, is to take time and develop your network — your personal network — with as many face to face meeting as possible. To conduct outreach to people in angel groups, incubators, business schools, and local business societies. Leverage your network of friends and family members. Get people to understand you and understand your passion in an intimate way. That way it seems to me your chances of raising early capital improves. Now it also depends on what was said before: ‘what kind of money do you want to raise?’ If in fact, you go through the crowdfunding methodology, which is perfectly legitimate, you are in fact trying to develop a relationship with strangers. I can understand it. It can work. However if you take on a large number of investors into your company, you should be aware that acts as a deterrent in many cases to the venture capitalists coming in later. Venture capitalists don’t like getting involved with companies that have a lot of different individual investors. They simply have an oil and water relationship to it. You may make it more difficult to go to institutional capital if you have a large number of small investors in your company. So if you do it that way, you should have a business model that can survive on that small money taking you to a milestone that will allow for an investment bank then to take you into the public markets or to get more individual investors involved. On the other hand, if you go to the family office market or incubator market, you graduate from angels — that are few in number — to venture capitalist that will readily align themselves with your company. So understand what kind of budget you will need going forward. If you go through the individual placement, whether its crowdfunding or other, be aware that this track is one in which you will probably have to follow through until its conclusion — until you say ‘raise money from the public markets.’
To watch the entire panel discussion click here.
Earnest Sweat is an Entrepreneurial Engineer for Camelback Ventures and an Investor in Residence for Backstage Capital. If you have any questions or requests please connect with Earnest through LinkedIn, Twitter, or AngelList.
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