Startup Funding Myths

Dr. Thorndike: “Do you really think that is nece…”

Professor Lilloman: “Don’t tell me what’s nece…. I’ll tell you what’s nece..”

Script from High Anxiety by Mel Brooks

So why the arcane quote? In this scene from one of my favorite Brook’s films, Dr. Richard Thorndike is being told by his mentor, an old psychology professor that he (Richard) needs psychoanalysis. Richard does not even get the chance to complete his question about if it is necessary; he is stopped in mid-word. His mentor tells Richard (again with a partial word) that he will tell him what is necessary.

The parallel for me is the guidance I constantly hear at MeetUps and other gatherings that those “in the know” give to startups regarding achieving success with funding sources. The common theme to me is these so called “advisors” never listen to the startup. Many just dive right in with their advice and while some of it is good, some just seems to perpetuate what I think are myths. It is the same phenomena we hear as tax advisors when clients call about some great tax saving gimmick they learned about on a golf course. Raising capital is an intense process requiring serious dialogue, so let me try to debunk or perhaps clarify five of the more egregious myths I hear:

  • You don’t need revenue – while this is true for very early start up funding, you do need a revenue model and a “path” to revenue. At some point, you have to show that investor money will eventually lead to a “salable product or service” and revenue will commence. Without that, you are going down a very long road.
  • You need an introduction from a trusted advisor – this is false. While an introduction from someone known to the funding source is helpful, it is more important to make sure when approaching a funding source that the stage of development they seek and the space they like match with you. A venture capitalist interested in emerging growth medical device plays is not the right source for an “ed tech” company seeking seed financing regardless of who introduces you.
  • You can build the team later – while true as to a full team, investors want to see more than one person dedicated to the Company vision – – how do you operate together, how do your skillsets match your business model. If it is just you and an organization chart with boxes that contain TBD, you are not going to make it.

You do not need a business model; just a product or concept – false. As the late Jeff Timmons would say “an entrepreneur knows the difference between an idea and an opportunity.” Business models validate opportunities.

You can use funding meetings to practice your pitch – false. I think the idea of getting before as many investors as possible for a true “funding pitch” is not the way to go. There are friends, professional advisors, pitch competitions and a dozen other venues to practice your pitch. A funding meeting is the real game – – not a warmup and you should treat it accordingly.

We have watched our entrepreneurial friends waste endless hours in the pursuit of funding. Some blindly follow all of this “advice” and have minimal success. Hopefully, by delving behind these myths, I can help shorten your journey.

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Your Dream Deal Team

“We have the tools, and we have the talent.” Winston Zeddemore – (quote from Ghostbusters)

You have decided it is time to sell your business and you hear that you should have a deal team.  So, “who you gonna’ call?” Do you think you can do it on your own or should you get help?  Here is some practical advice.

I am going to suggest a solid deal team.  However, please understand that the size of the transaction is going to determine what the team will look like. At this point, do not look at the individual players but the roles that have to be played.  I have seen smaller deals done with just a good transaction lawyer and an accountant.  But, before you go there, think of these roles:

  • Investment banker – they are the “broker” in the deal and simply put, if you wouldn’t sell your house without a broker, why wouldn’t you have this role in the sale of your business?  There may be “ugly” points that both sides have to make – having a pro as an intermediary really helps.  One who knows your industry can be critical in lining up the right buyer.
  • Lawyer – here there are two roles.  The “transaction” lawyer who understands how deals are structured and the “estate” lawyer who will help make sure you get maximum capital preservation / tax efficiency for the next generation.
  • Accountant – tax and deal structure as well as a trusted advisor who can help you quarterback the process.  And keep in mind, it is a process. You also need someone to guide you on the due diligence the purchaser will want to perform. Trust me; the bigger the check, the more questions they will ask (see my blog on the Spanish Inquisition)
  • Decision maker(s) – you need some governance around who is going to make the call when critical milestones come up.  Concluding on the Letter of Intent (LOI), due diligence requests, negotiating offers.  Put some governance in place before you start the process as decisions in this process are often time sensitive and usually emotional.  Better to set this process when the cooler heads prevail.
  • Financial advisor – someone to guide you on how to invest what you get from the deal.  Keep in mind, if you are an entrepreneur, you are probably used to being in control of your economic freedom. You can raise prices, trim staff or do what you have to do to run your business. You are nothing but a minority player in the investment world and you need an advisor who can help you understand what this means.

You will need to spend some money and good deal professionals can also help you manage this spend.  There are so many data points to consider; valuations, audits, stay bonuses, reward programs for key employees, etc. that it can be a bit overwhelming.  So make sure you get the tools and the talent and your chances for a successful deal will be greatly enhanced.  And keep in mind as Yogi says; “it will be over when it is over.” Good luck.