Raising Capital (2): Five Myths About Raising Capital

This is part of my Series on Venture Capital.

Let’s start by dispelling some myths about raising capital.

Myth #1: That because you've started a company, someone ought to fund it.

Fact: Actually, no one owes you anything. VC’s are in business to make money, not to take a bunch of fliers.

I am consistently amazed at how often I hear people complaining about how “vc’s don’t want to take any risks”.  Of course they don’t ! They want to de-risk deals as much as possible. Venture capitalists are already in the highest risk class of the alternative investments category.  Definitely keep this in mind when you are pitching your company to investors. Remember, fewer than 1% of start-ups actually receive venture funding.

Myth #2: That a first-time entrepreneur can raise Venture Capital money.

Fact:  Of the less than 1% of start-ups that actually receive venture backing each year, you can be assured that with few exceptions the leadership/track records of those companies are well-spoken for in the venture community.

If you are a first-time entrepreneur, 99.9% of the time you will be looking at funding your company with your own money, friends and family money, or, with angel money.

Myth #3: That investors will actually read your business plan

Fact: Investors do not read business plans. If they did, they wouldn’t be able to get any work done.

The way deals get done are through referrals to investors from trusted colleagues. A one-page executive summary is an acceptable way to initially share one’s company profile with an investor.  So never bother sending your 50+ page business plan  to someone unless they’ve asked for it. If you don’t believe me, see these links below from actual studies that have been carried out.

http://bit.ly/O4kO4   http://bit.ly/Cj92J

Myth #4: That a first-timer can raise money without serious proof-of-concept.

Fact: Unless you are Marc Andreesen or an uber-successful, cashed-out entrepreneur who has made his investors a lot of money, you will need to demonstrate a certain amount of traction before professional investors will even consider investing in you.

What I mean by this is as follows:

·        If you are a biotech entrepreneur, you will need to show at least strong results in animal studies.

·        If you are a medical device entrepreneur, you will need to show a working prototype, validation and support from multiple clinicians who would use such a product, as well as a clear path through FDA approval.

·        If you are a tech entrepreneur, you will need to show heavy traffic and consistent month on month growth to your site.

Myth #5: That because you have spoken to a venture capitalist about your company you are “in talks with investors”.

Fact: What this simply means is that you met someone that may or may not be interested in your start-up.

Spare yourself a lot of heart-ache and lower your expectations. If you’ve had a conversation or pitched someone who happens to be an investor, don’t get your hopes up until they are actually ‘in diligence’ and you have a term sheet.

Comments

[Bill Warner]

Solid advice.

Angels are more selective than ever. Entrepreneurs that have a well thought out and validated business model and a realistic plan of execution have a good chance. Encourage them to put much more discipline into their business propositions.

[Nabeel Hyatt]

How I wish I had this article to refer a couple entrepreneurs to just this last week at OpenCoffee Cambridge, since it takes time to keep trying to reset expectations. I've now bit.ly'd the url to http://bit.ly/raising so I can just refer folks to it on the fly, thx David for taking the time to write it.

[Dave Lerner]

Thanks a lot for the feedback Nabeel, much appreciated. Stay in touch!
Dave