During the dot-com boom of the early 2000s, Kirsten Mangers sought funding for her web-advertising company, Webvisible, and she endured all the slights and slings that entrepreneurs are accustomed to when they look for money. “An investor’s job is to beat you up and tell you your baby is ugly,” she says.
Mangers, who was a judge for Get Started Orange County, one of a series of fast-paced pitch competitions launched by Cox Communications, knows a lot about funding, and the mistakes entrepreneurs make in getting it. She finally secured $5 million for the first round of funding for Webvisible. Today, she runs Chicklabs, an incubator and consulting practice for women entrepreneurs. “When it comes to funding, nobody tells you the rules,” she says. Here they are:
Appeal to the heart, brain, and gut
When Mangers first stepped into a room with funders, she had a story to tell about how she’d “pillaged her children’s college fund” to start her company, which she had built up to $1.5 million in revenues. Her colorful wording was designed to express her passion and commitment. However, in retrospect, she says, “I didn’t remember who my audience was, and I wasn’t speaking in their vernacular.”
She learned that what investors wanted to hear was that she had a large, addressable market or compelling or differentiating intellectual property. “You need to appeal to the heart, brain, and gut simultaneously,” she says. “Investors want to hear about your passion and that they can get an eight- to 10-time return on their investment.”
Don’t be mystified by the process
John F. Dascher, a venture capital investor and judge for Get Started Wichita, began starting and funding companies in the U.S. and Europe 20 years ago. “[There is] a wall of mystification built around raising capital for entrepreneurial ventures,” he says. Echoing Mangers, he says it’s nothing more than a basic sales process: “Entrepreneurs are selling ‘worthless paper’-;pardon the condescending crudity in the reference-;in their companies to investors for cash. If you approach each investor like a customer, then walls come tumbling down, and the process isn’t that hard to grasp,” he says.
He adds that like any other sales funnel, an entrepreneur won’t convert each lead to a sale, and the sales cycle may be frustratingly long. Yet many entrepreneurs ignore basic selling strategies when they meet with funders. “I no longer get surprised when I see a brilliant sales entrepreneur go into a pitch in the morning (knowing absolutely everything about the unique situation for the potential customer/partner in play), but then go to an investor meeting in the afternoon (without a clue about the person they are talking to because, of course, all investors are the same),” he says.
Don’t take meetings too early
Garrett Ruhland, co-founder of health app Modern AlkaMe and a finalist for Get Started Orange County, believes many entrepreneurs seek out funding too early because they assume doing so “is part of the process.” However, he’s learned the detriment of reaching out to funders with a great idea that has not yet generated traction and significant sales. “You have few opportunities to meet people face-to-face, and investors are looking for a reason to say no,” he says. “If you don’t have something that people are paying money for, you need an even stronger track record of being able to deliver.”
His advice: Don’t get swept away with your idea, or the great story around it; focus on execution.
Look in your own backyard
Chris Schultz, CEO of Launch Pad and a judge for Get Started New Orleans, says entrepreneurs often become starry-eyed thinking about the riches flowing down from Silicon Valley VCs. However, he believes a better strategy is to stick closer to home. He says entrepreneurs should focus on an idea that their city thrives on, such as Nashville’s growing attention to healthcare or Charleston’s emphasis on human relationships technology.
He says that VCs outside your hometown will be wary if you can’t convince your neighbors to invest. Also: local angels can provide the mentorship and hands-on support a startup needs.
Don’t expect investors to get it
James Lawrence, who won Get Started Tucson with his Drone Control Systems, loves technology with a passion. But he discovered that investors’ pulses don’t necessarily race at the thought of distributed software systems or using cell towers to collect positioning information during drone flight.
“Communicating your idea is one of the toughest challenges a new start-up has when it comes to investors,” he says. “You have to remember that, as the entrepreneur, you understand your idea. But your investors or even your potential customers may not fully grasp it. This is especially true when the idea involves new or advanced technologies.”
Venture funding is your money
Never forget: funding is expensive. “Venture capital, where you sell equity in your company for cash up front, is not a gift, or revenue, or success,” says Kim Perell, an active angel who has invested in more than 60 companies and gets dozens of pitches a week. “It’s a loan on what are often very bad terms.”
Perell offers a final piece of advice with which many of the other entrepreneurs readily agree: “If you can build your business without raising money, you should consider it.”
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