Surviving fundraising’s slings and arrows
Many businesses need funds at inception. The source might be venture capital investment or fundraising, including crowdfunding.
Best speaks firsthand of fundraising’s slings and arrows. The first question is whether she recommends raising funds for businesses, and where it starts.
“This really depends on your business,” she said. “Some are capital intensive, others can — and should — be developed through revenue and growth. It’s not always clear which is which. Advisors are so, so important. You need experienced folks you can trust.
“I started with asking for advice,” Best said. “I went to some of the smartest people from different industries I knew and could reach, told them my idea, asked what they thought. Every one to three months I would schedule another meeting and show progress.”
Early ties in a startup’s life can prove fruitful later.
“Several of these early advisors became early investors, but only after developing a relationship with them,” Best said. “All of them led me to other amazing advisors. Cultivating a meaningful relationship with other entrepreneurs at all stages is crucial.
“Crowdfunding is excellent, but you first have to know who your customer is, what they want and that you are ready to give it to them,” she said. “The funding does not come before the crowd. The crowd comes first.”
Best took exception to the notion that entrepreneurs should not start if they need funding.
“This is the kind of talk that keeps women and people of color out of the races,” she said. “People who don’t need funding usually have money, or at least substantial income. You definitely need customers, but plenty of great businesses — such as Dropbox — can’t be built without capital.
“I did years of work on Seed&Spark, which didn’t generate any revenue but was sufficiently exciting to attract investors,” Best said. “I did show them the progress every one to three months.”
The biggest risk to startup fundraising is not being able to pay back investors in a timely way. You also need to keep investors from being able to make life-or-death decisions about your business.
“There are lots of risks, which should be mitigated by first and foremost having a great attorney,” Best said. “Who your investors are matters way more than how much money they’re investing. You need people who really believe in and support your vision.”
Another risk is if a business does not start to make money.
“Risk capital — which is early stage investment — is about helping a company take risks and be wrong in the beginning,” Best said. “You have to take risks to build a high-growth company. Investors also can be meaningful partners in growth.
“In the United States, most of these investments are made knowing full well you may never get your money back,” she said. “Never include terms that put pressure on the cash flow of a young business.”
Best acknowledged that different countries have different rules.
“That is why making sure you never take investment without working with a great attorney who represents you is so important,” she said.
As with countries, correct milestones will vary among companies.
“The right ones are different for every business, and every investor, frankly,” Best said. “You have to build a clear business plan with reasonable and achievable targets that are exciting enough to get investors involved.
“Sometimes your business may have a social return — doing good — or is trying to transform the way an industry does business,” she said. “There can be metrics around those two things unrelated to revenue that also get investors excited.”
As with any venture involving money and investment, patience is a must. There are few overnight successes.
“It. Is. Everything,” Best said of patience. “You cannot possibly rely on your own personal resilience alone. You have to have a team working with you — could be super small — friends who get you and other entrepreneurs you can really trust. It’s really a long, hard road.”
You must pick yourself up after continually being knocked down.
“This all day,” Best said. “At least four of those times you may need to get picked back up. So, have good people around you.
“Flexibility is also a crucial part of resilience,” she said. “It’s critical, but we always say, don’t be married so much to your idea that you don’t see the need to pivot or remodel when results are not showing.”
Targeted investors should have viable sources of funds. They also need to be content with long-term investment and not dictate your terms of business. Dependent but still independent.
“Seek investors who have been personally recommended to you by other entrepreneurs who have taken investment from them — that’s my №1,” Best said. “They have been meaningfully helpful as advisors. These people have a track record of investing in your space. Smart, nice people.”
If it fits …
Entrepreneurs might receive recommendations because they have funds but not the best fit.
“This happens all the time,” Best said. “Sometimes those folks surprise you and decide they want to get involved with you, support you as an entrepreneur.
“A lot of my best advice comes from advisors and investors who’ve never worked in entertainment,” she said. “They have an outsider’s perspective.”
It is possible to have market conditions turn against you during fundraising.
Hope for the best and plan for the worst. Changing market conditions are risks of any business. Write worst-case terms into start-up investing agreements to cover all parties and avoid misunderstandings if bad times come.
“A better-funded competitor also comes in and eats your lunch,” Best said. “You have to be nimble. You also have to stay ahead of the curve. Ask anyone with a dot-com business in 2001. Build product with real value to humans. That helps.”
When in doubt, put all terms of a deal in writing. If there’s no doubt, put all terms of a deal in writing. Leave nothing open to interpretation.
“Do I want to hang out with, work with and go through tough times with this person, team or company?” Best said. “Then really listen to your gut. Make sure you talk through the pros and cons — especially of any strategic partnership.”
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