Over the past five years, I've raised over $30 million in venture capital for my company. Along the way, I've met with over a hundred institutional investors from across the world, and after countless emails, phone calls, pitch meetings, and term sheet discussions, I've learned one important truth about investment capital:
Money is just a commodity.
The principal feature of a commodity is that it's uniform across the market. Soybeans are soybeans, corn is corn; these raw goods are bought or sold in a marketplace and their price is determined by supply and demand.
And money is money. A million dollars is a million dollars whether it's from an angel group, a venture investor or your friend's wealthy uncle. And while the source of the money will certainly come with important intangibles, the underlying commodity--the cash--is the same no matter who's giving it to you. The quality of the investor matters, but the cash spends the same.
When I was raising our first round--primarily from friends and family--I was fixated on the dollar amount itself. I knew the level of investment that it was going to take to hit our next milestone, and I was bound and determined to find it.
Because I was only focusing on the dollars, I failed to grasp a critical element of successful fundraising. Since money is a commodity, it trades in a marketplace like a commodity.
Here's what that means.
Money isn't in demand--you are.
Supply and demand combine to determine the price of money that you'll need to pay in order to secure it, just as when drought puts a damper on this year's soybean crop, the price of soybeans goes up.
Many first-time founders mistakenly believe that it's the money itself that's the scarce resource, and therefore the supply side of the equation is set by companies competing for these "scarce dollars." As a result, during my first funding round I felt pressure to accept term sheets that offered lowball valuations, overly burdensome structures or decidedly "founder-unfriendly" terms.
All that mattered to me was securing the money we needed to stay alive, and if it wasn't for one of my co-founders--himself an experienced hand in fundraising--stepping in to stop me from taking a bad deal, our company would likely be in a very different position today.
The reality is that we live in a world where growth capital isn't a scarce commodity. There's more investable cash looking for deals than there are quality companies who are worthy of that investment; this is the true imbalance, and this supply-demand imbalance means that an entrepreneur with a solid business is in the driver's seat.
Knowing that money is a commodity, and knowing that your investable business is what's in high demand, you can approach the situation accordingly. Run the fundraising process the right way, and you'll have the ability to be selective with your investors, drive better terms, and secure a higher valuation for your deal.
Your job as CEO is to increase the demand for participation in your investment round, creating market conditions that are favorable. And while your company does need the money you're trying to raise, approaching the marketplace for money with confidence will ensure you won't end up on the short end of the deal.
The money isn't the supply-side of this equation.You are.