Raising VC Funding Venture Capital is one of the most frequent topics in the startup…
Why Raising Capital Is More Difficult Than It Needs To Be
This guest post was contributed by BJ Lackland, CEO of Lighter Capital.
Securing funding for your growing startup can be surprisingly difficult. With stiff competition for limited sources of financing, many entrepreneurs are left empty-handed, even if their metrics prove they have great potential.
Here are five elements that unnecessarily complicate the fundraising process—and one missing element that’s too often left out.
Venture capitalists are courted daily by startups that look great on paper, so they make their first cut by focusing on people that have been vouched for. If you’re well-connected, you’ll have an easier time opening doors—and ultimately raising capital. Unless you have a personal connection with someone they can trust, VCs are hesitant to bet millions on the success of your startup.
If you are lucky enough to get in front of an investor, 30 minutes is often all you’ll get. In that time, you’ll have to make the case that your startup is ready to shoot for the stars and that the investor will get an astronomical payoff in return for their investment—ten times or more of what they put into your company.
How well you can pitch and present may have nothing to do with how well you can operate a business, but it is essential to get investors’ interest on the road to raising capital.
Hindsight is 20/20, but many venture capitalists believe they have a perfect vision when valuating startups simply because they make decisions based on their past experience. Does your company resemble a successful startup they have invested in before? Do you resemble a successful entrepreneur they have invested before?
Maybe you happen to be working on a product that’s hot or maybe you’re too much like other companies they have recently invested in and you are behind the curve.
It can be frustrating to have to hope that your company matches the idiosyncrasies of how VCs pick their winners. Luck isn’t always on your side; in fact, the odds are pretty low.
A lot of preparation
Fundraising can feel like it takes forever. One meeting is followed by the next, and another one that proves to be a dead end. So much time is lost preparing for presentations and creating proposals that don’t lead to a deal. Is this why you started a company, to be chasing after investors? If you’re like most entrepreneurs, you’d rather run and grow your business instead of wasting time on fundraising.
Personal credit score
We’ve covered equity financing above, but what about getting a small business line of credit from your local banks?
Bank loans are hard to come by for tech entrepreneurs, because they don’t understand your metrics. They’re stuck in the old underwriting standards of needing hard assets as collateral.
The one number you can expect your bank to ask is your FICO score. If you’re personal credit is spotless and you’re willing to secure a loan with your personal assets—your house, your retirement funds—you might get a line of credit. If that’s the way you’d like to fund your emerging startup is a different question.
There’s one element conspicuously absent from how VCs and banks value startups and that, surprisingly, is Data. Qualitative methods have their place, but not using the right data to qualify prospects is outdated. At Lighter Capital, which provides revenue-based financing to tech startups consider three crucial pieces of information in our underwriting process:
- Profit and loss statement
- Last three months of bank statements
- Customer list and sales pipeline information
With these data, we can determine quickly if a company is a good fit—and finalize financing in a much shorter time frame than venture capitalists or banks. D is for Data, but also for Deals: With a data-driven process, our deals typically close within 30 days.
BJ Lackland is the CEO of Lighter Capital, an alternative-financing provider for growing technology companies. BJ has spent his career working with emerging technology companies as both an operating executive and an investor. He has been a venture capitalist, the CFO of a public technology company, an angel investor, and a senior finance and marketing leader at tech startups. Follow BJ @bjlackland.