Your company might not be investable – Part I

Getting no from too many investors?

Raising equity funding is hard. It’s twice as hard if you don’t have a strong network or a track record of success in starting and scaling a new company. If you haven’t raised equity funding before, have a new startup and aren’t able to get “yes” from any new investors this perspective may be helpful.

One thing that is important to understand is how each kind of investor at each stage uses “pattern recognition” to help make their decisions on who to back next.  That is, they look for similarities in your company that they have seen before. The similarities can be positive – increasing your odds of securing an investment, or they can be negative– decreasing your odds of investment.

CED uses a “fundability assessment” as a tool so companies can take a self-assessment to see how close (or how far away) they are from what is considered to be a normal seed funding pattern.  We tell entrepreneurs that they need to be realistic in their own self-assessment, as well as there are no guarantees. A high score doesn’t automatically mean you will get funded and conversely a low score doesn’t mean you will not.

What if you are launching a truly disruptive innovation? The bad news is pattern recognition is not very useful.

Let’s look at Airbnb’s fundraising journey. Early on, the idea that folks would furnish a spare room in their house with an air mattress (or two or three) and then rent it out to complete strangers was not an idea investors could wrap their heads around- even in San Francisco. It took a lot of grit (multiple tries at SXSW), creativity and good timing (see the story of the democratic convention in Denver & Obama O’s cereal) and eventually a spot in Y Combinator to turn the idea into an investor-ready company, more here.

Increase funding your odds

First, you can spend less time chasing investors and more time de-risking the investment opportunity (or skipping investment all together).  Back to the Airbnb example, the founding team spent several years in early trials, customer discovery and iteration. Only then did they get accepted in Y combinator.

Secondly apply to an accelerator (Y combinator, TechStars etc.), there are so many of them now (one source is f6s ). Ideally find one that is aligned with the market or virtual industry you are trying to gain traction in (like Food tech, or Fin-tech or digital health etc.). It has been my experience that these “focused” accelerators attract investors who are interested in that space and mentors who have experience in that space. Both are great assets to have on your side as you prepare to launch and grow.

Alternatively, if you have a physical device with a working prototype and 6 letters of Intent (LOI) from prospective customers willing to buy, you should be able to find a partner who will help offset some of the cost of that initial manufacturing run.

Finally, you can focus on generating revenue and “self-fund” the venture. This is particularly the case with many e-commerce companies, but several successful tech companies don’t’ ever attract (or need) outside investment. SAS is one of the biggest success stories locally but also Bronto, Sharefile, Pardot, and many others bootstrapped their way to success.  One company I know that was a husband and wife founding team (often a pattern recognition that is a nonstarter for early investors) realized fairly early that if they spent the time and energy finding customers (verse chasing investors) they would increase revenues and would be able to self-fund for a much longer period of time. They have doubled business every year since.  They are clearly more investable now, but quite frankly, don’t need the money.