I often have conversations about financing with passionate entrepreneurs. The advice I give is that before approaching financing sources, it’s critically important to make sure that the company’s “foundational puzzle pieces” are in place in order to increase the probability of fundraising success. Unless each of the four is in place, you’re likely to create a negative first impression. And, as is often said, “First impressions can’t be undone.”
The four puzzle pieces that most financing sources need to see in place in order to invest:
The first foundational puzzle piece is the Market. To interest most investors, there needs to be a very large market, and that large market needs to be “in pain”, without a lot of competitors already in the marketplace. And the market must be willing to purchase our product/service at a price needed to fuel our desired growth.
Next, it’s absolutely crucial that our product be seen by the market as a necessity. Does it make the market’s pain go away? Said another way, will the market see our product/service as an absolute necessity? In today’s world, purchases are made for “need to have” rather than “nice to have”.
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The third foundational puzzle piece is the team. Rarely does a sole founder with an idea get funded.
Investors tend to look for a team consisting of:
- a smart, passionate CEO with prior product, market, and /or revenue generation experience
- a serial revenue driver – I don’t use terms like VP of Marketing or VP of Sales. I specifically mean a person who has experience in at least one and preferably more than one earlier stage company, creating and implementing strategies and tactics to drive revenue. The ‘serial” experience is important because if this person has had success in the past, they’re more likely to have future success (and more likely than someone in this role for the first time). Additionally, the past experience should be directly or indirectly related to this new endeavor’s business and/or industry. By way of example, if I’m putting together a team for a fintech company, bringing someone on board with a track record of revenue success in the biotech industry is less likely to instill confidence.
- a person with significant financial expertise who has worked with multiple earlier stage companies, helping to validate business models and revenue models and create financial assumptions and projections based on these models. This person need not be a full-time or even part-time employee. There are great fractional CFOs who have worked with hundreds of earlier stage companies on an hourly basis, providing expert financial and business advice and guidance. On occasion I’m asked by a founder whether they really need outside financial expertise on the team since they are an Excel expert (in addition to another area of expertise). While the founder may very well be an Excel expert, financing sources like to see independent finance expertise on the team in order to provide objective advice and guidance as business and financial models are validated and financial assumptions and projections are constructed.
- the Company’s technology lead who ideally has serial earlier stage company experience, particularly having evaluated and prioritized market needs and then translated them to a product / service vision, followed by creating and implementing strategy and plans to build an MVP followed by product roll-out progression, all geared to market needs.
The last of the foundational puzzle pieces is economics. Simply put, are the economics that we’re presenting compelling enough to get a prospective investor to answer “Yes”? If the answer is “Yes”, what’s the question? Ultimately, every prospective investor asks, “Am I going to get the return on investment that I need to get?” And how do they typically get to that answer? Let’s use a VC firm as an example. Many venture capitalists view an investment home run as 10x their money back (or more). The thought process is likely to be something like: if I make a $5 million investment for a third of the company (at a $10 million pre-money valuation), for a homerun I’ll need to get $50 million back which means the company will need to be valued at $150 million at the time of the liquidity event. Is it likely to be? What will they consider? Back to the puzzle pieces…
- is there a very large market “in pain”, without a lot of competitors?
- will the product / service be seen by the market as a necessity and will the market be willing to pay what we need them to pay?
- is there a compelling, experienced team?
- and do the business model, financial model, financial assumptions and projections all lead me to believe that there is a high likelihood that this company will be valued at $150 million at the liquidity event?
While different financing sources do look for additional attributes, these four fundamental puzzle pieces are the most likely to get you to “Yes.”
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