How to Find Investors for Your Startup
I've been working with entrepreneurs now for close to 25 years, and throughout that time one thing hasn't changed: Only 5 percent of all entrepreneurs get funded. Can it be that only 5 percent of the ideas generated are good enough to succeed? Why is it that this "magic" number never seems to change?
I believe there are three fundamental reasons contributing to this impasse. Finding ways to address these issues could significantly improve the flow of viable, creative ideas in this country and have a dramatic impact on our economy.
1. The system for evaluating entrepreneurs is arbitrary and inefficient. When you think about it, the methodology investors employ to find and qualify a potentially viable entrepreneur places almost all the responsibility on the entrepreneur. Once they have an idea, they must take the initiative to package it and promote it all to potentially interested parties. There're two problems with that system:
- It's the entrepreneur who decides what information gets presented, and
- Everyone who receives this information must process it from a cold start.
To illustrate how ridiculous that system is, it would be the equivalent of you going into a bank to ask for a loan and instead of filling out their application form, you just created your own. How would the banking system operate if everyone made up their own application? What entrepreneurs need is a scoring system similar to the one Venture Alliance uses to determine if you're really ready to get in front of professional investors. It'll also help you find quality resources if you're not. What the system won't do is help you bridge the gap between having a need for capital and actually being ready for it. That part is up to you.
2. Entrepreneurs don't understand the difference between having a need for capital and being ready to ask for it. In a system where the entrepreneur chooses the application, it's not surprising that their timing for when to submit that application is often out of sync with the very investors they're trying to impress. Why? Because entrepreneurs are motivated to seek capital based on need, not readiness. What do I mean by that? Here's the difference. When an entrepreneur is driven by a strong sense of need, the message they send to an investor is one or more of the following:
- I need you to bail me out of my bad management of the limited capital I had.
- I'm unwilling to invest any more of my money, so I need yours.
- I haven't been able to raise money from anyone else, so I need you to save me.
On the other hand, when an entrepreneur has "done their homework" and truly understands what it takes to run a business, the message they send is:
- I'm ready for a partner to help me take this to the next level.
- I have a handle on my product, my market and my customers, and I'm ready to accept an investment that'll help me grow.
- I've researched the various sources of capital available to me and I'm ready to work with you because you're the best match.
Since most entrepreneurs are unwilling or unable to determine when they're truly ready, one goal of a good rating system should be to make that call.
3. Entrepreneurs often struggle over whether to fork over their own money vs. paying someone who won't deliver, leading to a freeze on progress and a slow painful death of their vision. Admittedly, the entrepreneurial industry is flush with charlatans just waiting to take advantage of a vulnerable entrepreneur. However, a far bigger problem is that many entrepreneurs with absolutely stellar ideas simply don't understand that building a business requires tons of sacrifice (including money), and they're just not willing to pay the price. So how do you deal with this conundrum? There are two ways to approach it:
- From the investor's perspective: We'll always look for entrepreneurs who demonstrate to us their willingness to "put their money where their mouth is" and who clearly "have skin in the game." If we don't see indications that they believe in their vision enough to invest their own hard-earned cash, then we won't invest either.
- From the entrepreneur's perspective: Don't hire anyone without checking their references thoroughly. Talk to previous clients. Be wary of "guarantees." Look for resources that'll take at least part of their reward based on the success of their service. That way, they know they must perform to get paid "the big bucks."
Running your business should be a lot like running your household--you know it's going to cost money and your resources aren't unlimited. So, be prudent on how you invest your limited capital, but realize that an investment is required. Have a plan and follow it as long as it's working. Be flexible, be tough and be open to new ideas. Not every thing will work as you planned.
Jim Casparie is the founder and CEO of The Venture Alliance,a national firm based in Irvine, California, that's dedicated to getting companies funded.