Raising money is HARD. It is the hardest task you as a business owner will ever undertake.
Let’s start with some metrics:
- 57% of startups are funded by founder loans
- 38% funded by “Friends and Family”
- 43% by banks
- .91% by angel investors
- .05% by VC firms
- Crowdfunding — not yet a significant source of capital for US start-ups, but it’s growing. According to the article here of StartEngine, one of the largest equity crowdfunding portals, as of February 2019, since crowdfunding inception a few years ago only $176 Million has been raised via crowdfunding.
Even though raising capital is hard, the process is really quite simple. All you need to do are two things:
(1) create the proper tools, and
(2) go looking in the right places for capital.
Relative to point (1), no one would think to build a house without the necessary tools – yet many/most/virtually all inexperienced (and even many experienced CEOs) seek to raise money without the necessary tools. (More on this topic in later articles.)
Relative to point (2), even though venture capital firms only fund 1/20 of 1% of startups in America, many entrepreneurs automatically think of seeking VC money to fund their start-up.
This is a bad plan, because:
(a) the odds are against you securing VC funding (see metrics above), and
(b) VC firms* are looking for a business that has the potential to become a “unicorn,” and
(c) VC firms* are looking for very specific types of founders and CEOs.
Relative to point (b), why are VC firms typically only looking for a business that has the potential to become a “unicorn”? Because of every 10 deals funded by a VC firm, on average, 3 – 4 deals will go “bust” and the invested capital will be 100% lost; 3 – 4 deals will return only the amount of capital invested or produce a modest return; and, the remaining 2 will produce phenomenal returns.
Hence, if the VC firm does not believe that your business has the potential to produce a phenomenal return, you’ll never be funded by a VC firm even though you otherwise have a good business. For example, most entrepreneurs would think a $3M revenue business that grows 50% a year would be a good (even great) business. Not so a venture capital firm.
Let’s look at the numbers:
Year 1: $3M revenue
Year 2: $4.5M revenue
Year 3: $6.75M revenue
Year 4: $10.125M revenue …
Year 10: $115.32M revenue
Compare this with Amazon:
Year 1: $0
Year 2: $511,000
Year 3: $15.75M
Year 4: $147.8M
Year 5: $1 Billion annualized sales
So, you get the point.
Relative to point (c), VC firms are looking for very specific types of founders and CEOs. For example, if the founder/CEO had a successful “exit” previously in a VC – backed venture, chances are good the founder will secure VC funding again as discussed here. If the venture has 100% women founders, the chances of it obtaining VC funding are less than the chances of earth colliding with an asteroid. See my article here published by equities. com. And, the list goes on and one. Again, if you don’t have the attributes they are looking for, you’ll never be funded by a VC firm.
In sum, the two simple rules of raising capital are:
- Create the tools you need to raise capital.
- Look for sources of capital that might actually fund your business.
We’ll continue this discussion in later posts.
© Ronald A. Woessner, May 5, 2019
Mr. Woessner, of Dallas, Texas, is former Senior Counsel to the Financial Services Committee of the US House of Representatives where he was special advisor to then-Chairman Jeb Hensarling for capital formation and fintech matters. He has worked in the smaller-cap company ecosphere for 25+ years in the capacity as general counsel to two NASDAQ-listed companies and CEO of an OTC-traded company that he up-listed to NASDAQ, following private law practice. He currently mentors, advises, and helps start-up and smaller-cap companies raise capital through Regulation Crowdfunding (CF) and other means. He also advocates in Washington DC for policies that create a more hospitable public company environment for smaller-cap companies, enhance capital formation, promote entrepreneurship, and increase upward mobility for all Americans, particularly minorities. Mr. Woessner, a certified Toastmaster, is a frequent contributor to equities.com and speaks and writes about US public and private capital markets matters. For more information on Mr. Woessner’s, see https://www.linkedin.com/in/ronald-woessner-esq-3645041a/.