A Startup that can’t raise enough capital. Well, this one is sort of obvious and sort of tragic and, unfortunately, it happens all the time. So let’s talk about what it takes to raise capital from investors with an emphasis on VC investors. The reason is that angel investors who can be an asset to a company play the game the VC way, so understanding VC’s leads to understanding quality angel investors.
First, to set expectations, in a given year, remember that about 3% of startup deals that get their first serious funding that year, actually get funding from institutional investors, primarily VC investors, the rest get it from angel investors.
In 2018, according to the NVCA, this was about 2,040 companies raising first-time funding from VC’s out of a total of 8380 venture backed companies receiving funding during the year. This doesn’t count those who self-fund, crowdfund, bootstrap, mortgage their houses or convince family members to fund their businesses. (More details and numbers about this in our course “Designing the Perfect Investor™“)
We’re going to talk about these issues over a couple of posts because it’s complex and it matters! Helpfully, the Stanford Venture Capital Initiative (from my beloved MBA alma mater!), surveyed 681 VC firms, out of the NVCA’s estimate of approximately 1000 total U.S. VC firms, on their decision making processes.
After you’ve designed your Perfect Investor™, one obvious question is “how do I get in touch with investors?”
The Stanford research provides some good insights about how to envision this process. First, “The average firm in our sample screens more than 200 companies and makes only four investments in a given year.” This speaks to the low probability of raising money from VCs unless you have a crisp, clear strategy that you can execute.
Second, the Stanford team says, “Most of the deal flow comes from the VCs’ networks in some form or another. Over 30% of deals are generated through professional networks. Another 20% are referred by other investors while 8% are referred by existing portfolio companies. Almost 30% are proactively self-generated. Only 10% come inbound from company management.”
Wait, only 10% of funded deals come from an entrepreneur sending an email to the VC of their choice! Oh, you already knew that! But, if you didn’t, check out our advice on Networking in to Perfect Investors™ which reflects this reality!
If you’ve been reading along, then you know our philosophy on “Designing the Perfect Investor™” and why this is the most likely way to raise sufficient capital. The truth is that there many, many investors out there, just sitting around all day WAITING for what you have to offer! That Perfect Investor™ wants to invest in your theme, in your round and stage, in your geography, in the right amount to accelerate your business.
An entrepreneur I talked with recently expressed frustration that so many potential investors would ask stupid questions, even after hearing a very succinct and clear positioning statement! (which sounded so much like this story about what NOT to do!)
With the odds so against you, make sure you get the insider info that you need! There are very few people out there who have both raised money AND who have been on the funding side and are willing to share investor and VC insider info. We will because we are focused only on helping entrepreneurs win. Check out “Designing the Perfect Investor™.” For less than the price of one failed airline ticket to visit a “wrong investor”, you can get our inside scoop, plus we are giving members of our community a discounted search of our upcoming InvestorFind™ curated investor database! Just drop us an email at VentureWrenchCommunity [at] gmail and let us know you want to take advantage of this special offer!
We are Working our Way Through 10 Reasons Startups Die
Destructive corporate culture
Failure of product – market fit
Founder issues and conflict
Staffing and Team problems – poor hiring choices or inability to prune staff appropriately
Can’t raise sufficient capital
Run out of cash after raising capital
Scaling too soon or improperly
Intractable technical problems
Poor strategic environment (customers, suppliers etc)
Regulatory problems (forseen or unforseen)