How to Avoid Fundraising Woes (Hopefully!)

“The hurrier I go; the behinder I get” – quote by Lewis Carroll

I talk to so many startups that struggle with fundraising that at times it is really heartbreaking.  Well-intentioned and motivated entrepreneurs seem to get their dreams crushed by turn-downs and wasted meetings. While I have been advising startups for more years than I care to remember, I promise to find financing.  So, a quick story on that point.
It was a number of years ago and I was working with a company that had pioneered some really groundbreaking voice recognition technology.  They were making the rounds with investors and having a bad time of it. They approached me and I thought it fortunate that I knew an investor who understood this space.  We worked on refining their approach and they had their meeting.  They were told at the end of the meeting that both their team and technology were really top-notch, but the investor already had a voice recognition investment and wanted to diversify.  Once I heard this, I decided I did not have enough time in the day to get inside the mind of all the investors out there and thus, my no promises on funding pledge.
So what are the three things I find are major contributors to fundraising woes:

The first is clearly the lack of a sustainable business model.  Your solution must address a real problem (see my blog “Are You Selling Aspirin or Vitamins?) and be elegant in its simplicity.  Making it too complex to use is a no–no as is the model which will rely on advertising (eyeballs) to generate revenue.  If it takes three slides to describe your model or it requires too many revenue streams, it will not work with many investors who have come to appreciate the fine art of simplicity.  For you older folks, this in my opinion is why Excel endured and VisiCalc did not.

Next, approach the right investors.  For established companies seeking to expand, there are various sources of funds, from cash-flow lines of credit to asset-based loans to private equity and subordinated debt.  Financing 101 says match the financing need with the proper source.  It is the same for emerging growth companies.  Seed money is not venture money – getting a VC to get interested in your pre-revenue startup is an impossible mountain to climb.  Focus your efforts to match your stage of development with your financing source.

Finally, make sure your market is big enough.  I just reviewed a pitch deck for a “commission type” model.  All the market size data was based on gross sales which really exaggerated the market opportunity as certain sales in that space did not involve a commission.  If a CPA like me realizes that point, so will an investor.  Stay relevant and make sure there really is a big enough market.

So, if you want to avoid running around in circles as you undertake your rounds with investors, please keep these ideas in mind.  It may not result in success but at least it may keep you from spinning your wheels.  Good luck.

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Buy / Sell Agreements – Don’t Let This Happen to You

“Doug died” – two word obituary of Doug Legler of North Dakota

My sister and I share Doug’s irreverent view of death. I am sure this may give some of you cause for concern but perhaps we both realize there is little you can do about death so why not poke fun at it. Quite honestly, besides the strange looks we get from other family members, what’s wrong with it? When Steve Lawrence the singer passed, our natural response was “blame it on the ‘Bossa Nova'” his late wife’s hit song; the death of Jim Henson (Muppet creator) prompted an inappropriate reference to Kermit the Frog’s tune – it’s not easy being blue.

But in business, death of an entrepreneur is a serious issue – how do you buy out an owner who has passed. Though the event is inevitable, suppose you don’t have the risk covered? Good planning and the right insurance can mitigate this risk but sometimes “stuff happens” and you end up in a bind. I see this quite often when I inquire about buy / sell agreements and I thought I would share one classic example with you.

This may take a couple of minutes to set the scene, but please bear with me. I had a company I consulted with and after addressing a series of ownership issues, I asked to see the buy/sell. This is standard operating procedure for me and while I am not an attorney, I assume that if I have concerns or issues based upon what I read my entrepreneur / client probably does as well. While this agreement was pretty straight forward, I found what I thought was a rather toxic provision; at death the surviving owners bought out the stake of the deceased owner personally utilizing a full recourse note for any shortfall in purchase price which life insurance did not cover. This business was very profitable and the owners all had significant wealth. What this meant in laymen’s terms was that the survivors were “fully on the hook” for the note to cover any insurance shortfall. When an attorney reviewed the agreement, he agreed with my assessment.

I did a quick calculation and realized that based on current earnings, each of the survivors would need to use all of their accumulated wealth to pay for the current shortfall with the only out being a potential “fire sale” of the business to generate liquidity. Fortunately, we caught the problem, changed some of the toxic terms and obtained additional insurance to close the “gap” and just in time as certain key owners became uninsurable just a year or so later.

While buy / sells cover a shareholder’s departure under various scenarios, many situations can be negotiated with living principals thus not necessarily forcing liquidation as would be the potential outcome here. So my simple advice is this – – just as a periodic review of your will and succession plan is a best practice, your buy / sell agreement should be part of that process. You don’t want an obituary (whether two words or two pages) to result in turmoil for your business.