Your startup needs a funding pipeline

A fellow entrepreneur* was asked by a VC “Why do most startups fail?”  My friend, already a very experienced executive, related that he gave many answers including product, management, marketing, basically everything he could think of.  The VC then said, very firmly, “They run out of money!”

The truth is that all of the mistakes my friend related can contribute to a startup failing, because they can contribute to that final, fatal state, “running out of money”.

It’s one of the reasons that we talk to much about bringing capital into your business.  Until you get to “customer funded”, you’ve got to GET funding.

And that brings me to today’s point – you need a funding pipeline or, if you prefer, a funding strategy.  I’ve written before about different “types” of funding, but you need to think about the right type of funding for each stage of your business.  How are you going to create your product or service?  launch into the market?  scale as customer demand scales?  What is the right “type” of investor as well as the right amount of money at each of these stages.  You know that our philosophy for raising capital is called “Designing the Perfect Investor“, and how can you design the perfect investor if you haven’t reflected on a funding pipeline?

For example, companies which are developing deep technology, that is technology that is both high risk and high reward (and usually expensive to develop), may want to consider the federal SBIR program (Get our FREE VentureWrench Guide 40 Ways to Improve your SBIR Proposal! ).  Although this is called a single program, but it is really a collection of many programs.  First there are two variants, SBIR and STTR, and on top of that, every agency with more than $100 million in extramural funding runs their own SBIR program, conducting it with their own rules and requirements. Agencies with more than $1 billion in research funding also conduct the STTR program which requires an outside research partner. SBIR funding is a great technology funding mechanism, but it is only one part of your funding pipeline. Even an SBIR awardee will need follow up capital!

I was on a panel discussion recently with U.S. Congressman Chris Stewart and we talked about the value of SBIR funding and the fact that it’s part of your funding pipeline. Check it out below (and then keep reading!)

If your product is a consumer oriented product, then what about crowdfunding, is that an option? And is it “crowdfunding for stuff” or “crowdfunding for equity“?  If crowdfunding can work for you, and you get the product “built”, how do you fund getting it into the market?  Market launch and then growth requires its own set of expertise and its own set of costs.  If you build it, they will most certainly NOT come, unless they know what you have to offer! So what type of capital is suitable for the marketing and launch phase?

In some other cases, when total costs of development are low, a small friend and family or angel round might be appropriate, or if you are developing a more costly product or service, then a pipeline of early funding followed by multiple VC rounds will be required.  And those rounds will range from seed and then early stage up to Series A, B, C, D etc, and then potentially into private equity funded pre-IPO rounds.  And don’t forget non-traditional investors like family offices which are emerging as a meaningful, but not particularly well understood, source of direct to company investment (instead of investing through VC and PE firms).

Don’t forget, no matter the elements of your funding strategy, it takes 6 to 12 months to bring any type of capital into your business!  Hence, the need for a pipeline and the attendant plan! Sit down and focus.

*This is not a FOAF, but is actually a true story that I heard from him personally!

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If you are considering submitting an SBIR proposal,
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40 Ways to Improve your SBIR Proposal!

Our guide provides tips from the perspective of an experienced reviewer to help proposing teams avoid unnecessary mistakes and improve their SBIR proposals.