Pain, Fundraising, and the 4 Skills for Success

Entrepreneurs are typically gifted with passion, creativity, and tenacity but most are doomed to make the same predictable, painful, and avoidable mistakes when it comes to properly fueling their businesses. Raising capital isn't rocket science, but it's still a science, and success in this endeavor is often the single greatest determinant of both short and long-term business success. Yet most entrepreneurs believe that raising capital is some burdensome task only to be performed when the money has run out. Alas, most soon learn—through pain, anguish, and opportunity cost—that fueling a business is and always has been the core purpose in life for the entrepreneur.  This truth only applies to every business leader in every business, always and everywhere.  The good news is that there are some basic skills that can be mastered that will significantly decrease the odds of getting absolutely crushed.

Know Your Job. 

Most entrepreneurs hate the idea of raising capital and would rather focus on more entertaining (and much low-value) activities in their business than suffer through the capital-raising process. The belief that their wit, charm, and current business progress will shake funding from the magic money tree when they really need it creates severe and predictable pain for the entrepreneur—and tremendous long-term pleasure for outside investors who get to pick up the pieces for cheap.  This process is pervasive and well-known: business cash gets depleted, operations get disrupted and entrepreneurs rush out clumsily to fuel their business—and investors swoop in with less-than-attractive valuations and investment terms.  Raising capital must be an integrated part of the day-to-day business process to allow entrepreneurs to effectively communicate their value and align the business with the fuel that best fits the current and future business goals. 

Choose Wisely. 

With roughly $1 trillion of investment capital on the sidelines, the reality is that investment capital isn't scarce and really never has been. What's scarce is the proper alignment of the right opportunities with the right investors and this has been the bane of entrepreneurship forever.  Just as no two businesses are alike, no two investors alike, yet businesses continue to pitch their opportunity to the world of investors with zero consideration of the investor’s type, size, model, thesis, fit, or alignment. One of two outcomes almost always occurs: 1) the investor passes on the opportunity and leaves some useless and distracting parting advice for the entrepreneur (e.g. “increase your SaaS revenue, get more traction, strengthen your margins, protect your IP…etc.") or 2) the investor invests but compensates for this misalignment by offering up one-sided investment terms and conditions. If you weren’t paying attention, neither of these options is attractive. Well-aligned investors are equal partners in a market-priced transaction that have aligned financial incentives to see the business succeed.  Anything else is just a miserable distraction and a guarantee of a long, painful, and soul-sucking future for the entrepreneur. 

Dilution with Purpose.

Most entrepreneurs have a paralyzing fear of dilution and loss of control but continue to do things that are far more dilutive to the upside value of the business than raising capital.  Serving bad or high-maintenance customers typically causes far more ‘value dilution’ than taking on investors yet businesses continue to service bad customers because they don’t have the cash to tell them to just go away. Injecting capital at the right time and with the right terms helps entrepreneurs unshackle themselves from crappy customers, focus on what matters, and emerge stronger, and more productive. Even greater dilution comes in the form of lost opportunity associated with slow painful growth fueled only by the trickling in of some free cash flow.  While this isn’t as overtly obvious for many established businesses, it's deadly for start-ups or high-growth companies. The ability to accelerate the business, steal market share, buy competitors, create new products, or just hire and retain the talent you need to build the business is most often worth a modest amount of dilution.  

Serve Your 2nd Customer Constituency.

Customers willingly trade current value for the products and services that businesses provide.  Businesses then work to strengthen customer relationships by improving products and services and recognize that their job is to provide ever-increasing levels of value to that customer.  At the same time, investors willingly trade current value for the equity or future value of the business.  Yet entrepreneurs rarely think of investors as customers and do little to actively communicate improvements in the value of the underlying 'product' that the investor bought. Just as ignoring or mismanaging a customer leads to contention, this lack of customer-focus on the investor almost always creates painful tension and animosity between the entrepreneur and the investor. Investors are effectively the second customer constituency to the business and deserve the same sales, marketing, and customer service support that are provided to those customers who buy the businesses products and services. Investors that are treated with the attention, service, and respect that customers get become the champions, supporters, recruiters, mentors, and, ultimately, the next-round investors for the business. 

Entrepreneurs don't jump into business because of the love and joy of fundraising. But there's absolutely no reason to be miserably bad at it either.  Those that continue to suck will find themselves passed by their competition and left wondering why they got beaten so badly.  Entrepreneurs who respect their primary fueling role, understand the investor landscape, treat investor like customers, and approach fundraising with the same passion, creativity, and tenacity they bring to other aspects of their business will win. Always.