Startup investment raising is broken

Could data solve the problem?

TL;DR

The investment market place is broken because:

- Startup founders just bombard investors with opportunities

- Founders think they will find an investor if they just keep trying, not by improving the product

- Investors spend most of their time filtering (saying no)

- Investors don’t help by taking meetings even when they know there is no fit

- It’s a highly inefficient market place

Could data solve the problem?

Raising investment sucks

Anyone who has been through the process of raising investment — either as a startup founder or as a VC raising a fund — knows how much it sucks. So why are we all still doing it the same way? Why have we not disrupted the very space we live in? Maybe it’s like the plumber who has the worst plumbing in his house because the last thing he wants to do when he gets home is more plumbing. Or is it that we are just blind to the inefficiencies and problems in our own world?

Equity investment raising is a marketplace; you have investors on one side and startup founders on the other, and like any other marketplace you need good control of supply & demand for it to work. While it looks like, for the most part, we have a good equilibrium between supply & demand, we have massive inefficiencies in the market place.

Investment Marketplace problems

For Startup Founders

If we took a glib look at the problem through the eyes of another marketplace we would realise how inefficient the investment space is. Lets say you are looking for a house cleaner and the only way for you to find one is to spend 6-months interviewing different cleaners, where you are selling the virtues of your house and they are asking you difficult questions. Until one day you find the cleaner you click with and they like the look of your house and you then start a lengthy legal process before cleaning can begin. Lucky for us the cleaner market was never that inefficient and Handy.com came along to remove any friction left in the market. Today, finding a cleaner is just a few click or swipes away.

Yet, in the investment market place thats exactly the journey most startup founders go on — an endless array of emails and meetings with most leading to a ‘no’ or, worse still, they are just left hanging. One in 50 investors they contact actually invests, so if the average SEED round has five investors, thats 250 investors they need to contact to close the round. That’s why they say raising investment is a full-time job!

Shotgun approach

Most startup founders are new to the investment raising process, so there is a lot of learning as they go. They start with what they have read about raising investment — mostly US-based information which doesn’t translate well into Europe. They read the success stories in TechCrunch, i.e. startup X raising a $ X million seed round with only a pitch deck, and then apply that to their world. So they start by getting a list of VCs and just cold e-mail them (and maybe the odd high profile Angel for good measure). This we call the shotgun approach to finding an investor — it takes no consideration of investment stage, previous investments, geographical restrictions, typical investment size. And yet no startup founder would dream of the same approach with their sales process for their product. So why do they do this with their investment raising? Probably because its time consuming to profile investors by hand and, despite the invention of Angellist, its tough. So they don’t bother — its quicker to send 100 shotgun emails than it is to profile 100 investors.

Its not me its you

When I chat to founders about raising investment they always talk about the high number of investors they have talked to and state that ‘they just haven’t found the right one yet’. Which is code for ‘its not my startup thats the problem, its because I haven’t found the investor yet who’s willing to take the risk’. This is most prevalent in the really early stage startups that have little, but still dream of a VC writing a cheque for them to build it.

For Investors

Investors are on the receiving end of the shotgun approach and therefore spend 80% of their time filtering and responding to startup founders who are clearly not suitable for them. This has a dramatic effect on the investors resource profile; if its a VC then a lot of their resource is used up by filtering, and if its an angel they probably ignore most requests and rely heavily on recommendations from a trusted source.

This is a massive inefficiency and adds significant cost to a VC’s model, which ultimately means less capital available for startups and less return for investors.

One of the side effects of founders taking this approach is that the noise level is so high that investors start to look for other decision signals — such as PR (tech crunched), pre-filtered via an accelerator or incubator, known repeat entrepreneurs or recommendation only.

Investors are not blameless in this though. By taking meetings with startups they know they will not fund — perhaps to grow brand awareness, to gather intelligence from founders or to make early contact for future rounds — gives founders hope. As a result they may send another 100 shotgun emails in the hope of another VC meet.

If you flip this on its head and look at it from an investors point of view, then you can see that they are playing a giant game of Whack A Mole — they wait for the bright shiny startup to pop up and they whack it. They miss all the other ‘moles’ out there who don’t know how to cut through the noise and look bright and shiny. Although they think they are selecting from thousands of opportunities per year, they are actually selecting from just a handful of moles that pop up. That’s why they have a 1:10 model for returning the fund.

Potential Solution

The marketplace is highly inefficient. Despite numerous startups and investors being added to the market, the difficulty in raising investment is as hard as it always has been and favours the few.

What if?

What if the founders had a tool to profile investors and match their startup against those who have the highest probability of investing? If they were just to approach them, this would reduce the noise in the market.

What if we had a European-wide scheme (like the London Co-Fund green light program) which told startups whether they were ready for investment? This would educate founders on where they need to be to raise investment, and would reduce the noise in the market.

What if investors had a tool to profile startups and identify those that fit their investment criteria, and made a direct approach rather than waiting and filtering emails?

Wouldn’t this bring efficiency to the market?

The availability of data around investor and founder matching is now greater than its ever been, so our ability to profile and match startups to investors should also be at an all-time high — but it’s not. There are a few people trying to solve this problem and some of the bigger VCs are turning to data for answers but its still in its infancy.