Raising funds for startups is a popular topic today. A new article on the subject is released almost daily that espouses ‘the secret to getting your potential investor to say yes’, or ‘five tips for fundraising success’, and so on. All over the world, multiple startup founders are endeavouring to raise funds from a venture capital firm or angel investor on any given day. However, very few get funded this way; in fact, less than 1% (0.96%)! Should we simply accept the status quo and move on? This article explores some basic principles to better understand the process as a startup or investor. It also asserts that there are more effective ways to attract support and partnership in the startup arena, provided a number of key issues are addressed first.
Common misconceptions about investors
Many startup founders believe that investors are wealthy individuals who achieve their riches through a stroke of luck from the universe. This perception leads them to assume that investor funds should be shared far and wide. I remember the time when a startup founder approached us at Engenesis Ventures and said, “That investor we know has plenty of money! Investing $300,000 in my startup should not be such a big deal for them”. He had a genuine sense that the investor had an obligation to hand over those funds and not hoard the cash.
Another popular misconception we’ve observed at Engenesis Ventures is that startup investment is seen as a ‘roulette wheel’, that it's a game of striking it lucky. Many entrepreneurs seem to relate to their startup in much the same way as they would relate to a poker machine in a gambling house. For them, it's simply a numbers game that hinges on luck more than anything else. Both are absurd ideas. Put yourself in the shoes of an investor, and you would appreciate that they have invested a significant portion of their time and effort into polishing and transforming their Ways of Being. You would also realise that they have identified the mechanics of how their industry or domain works and mastered it to the extent where they could generate substantial value and receive money in exchange for that value. Naturally, there are exceptions to the rule, such as individuals involved in unlawful or corrupt business practices, but that is an entirely different conversation. The vast majority of wealthy investors have contributed significantly to society and, in the case of investors who are also entrepreneurs, to their customers and staff.
Why would an investor choose to invest in a startup?
Ask any investor to articulate their burning pain, and most will tell you that it is the fact that they need to speak to too many startup founders to find the good few. For example, American entrepreneur and angel investor in companies like Uber and Calm.com, Jason Calacanis, says that professional and full time angel investors are recommended to take almost 500 meetings each year to build a substantial investment portfolio. The question is, why would an investor choose to invest in a startup at all? The answer is that investors seek opportunities to create more value in the world. In other words, because investors have worked hard to generate a substantial amount of money throughout their lives to date, they become more focused on having their money now work hard for them.
What does this mean for you as a startup? An investor is looking at you and your team as a potential means of generating greater value than a bank, loaning it out to others or placing funds in a number of other areas where that money could be put to work. So, as a startup, it is important to understand that an investor is not obliged to give you a sum of money. Instead, it is your responsibility to demonstrate to the investor that you are worthy of receiving capital from them and transforming its value through effective entrepreneurial activity.
Trust and the relationship between the investor and the startup founding team are also critical factors to consider. The combination of your commitment to using investor capital to build a company of substance and a strong and trusting relationship with an investor plays a major role in supporting you to secure investment. For example, a startup founder who successfully raised $1.4 million told us that he had taken the time to build a relationship with his investor over a two-year period. He consistently updated the investor on his team’s progress during that time. He also made his passion, authenticity and commitment clear, deepening the relationship and level of trust over time. Consequently, it was a relatively straightforward process to raise funds when the timing was right.
While many more factors are involved in raising funds for startups, the fundamentals highlighted in this article are at the root of why so few are successful in their fundraising efforts. If you're a startup founder, I invite you to consider whether your startup venture is worthy of an investor’s energy and resources. Start by asking yourself if your idea deserves your own time and money. Do you have the level of care, commitment and resourcefulness to create a product or service that will significantly benefit the market you serve by solving their burning pain? If you respond affirmatively to these fundamental questions and take the time to build a relationship and trust with an investor, you will put yourself in a far stronger position to raise funds. Imagine if this were the case on a collective scale. We would see far greater levels of startup investment and more significant returns and positive outcomes from thriving companies that are contributing to the world.