No Deal is Better Than a Bad Deal (When Looking For an Investor)
It takes a lot to build a successful business. Idea, timing, market, knowledge, information, meeting the right co-founder, finding your first customer, and on the list goes. You also need (some) money and it is possible to go through the initial phase without external investment and on a shoe-string, aka bootstrapping.
This is my favorite route for a new company beccause it forces you to think very carefully about how you set the business up, make difficult choices when it comes to spending the little money you have, and how you can create a lean and focused organisation.
Since cash is the fuel of every business, at some point, external cash will most likely be needed to properly propel your idea to the next level. Finding investors is both an interesting and difficult time for entrepreneurs. You are about to give up a degree of control over your “baby” but you will equally gain both funding and professional support.
Where do you go from here?
Where to Get Funding
There are several sources for finding funds -- it is important to know what and where to look for it. This is largely dependent on the evolution and growth of your business. The below is a (very) rough guide to fundraising depending on your growth stage.
- Friends/family/HNW (High Net Worth individuals) This is often route one for a pre-revenue business which still has to prove itself. Some types of businesses, depending on location and industry, can also look for grant money from a government entity. There is plenty of grant funding around, so do your research carefully as you may be missing out.
- Angel/seed funding Once you have a product and some revenue attached to it you have opened up the business to the angel/seed funding market. Investors in this catgeory do not necessarily need a full fledged product-market fit -- i.e. you know exactly who/what your customer, pricing model, market coverage, etc. is -- but they like to see traction, structure, and a record of spending the funds you’ve had in a targeted way, yielding some kind of output and results. This will prove to them you can channel any additional funds they’ll give you in an efficient way.
- Early-/Late-stage VC Now we have entered the first realm of what’s called “institutional investors” -- seed funding can in some cases be institutional. Here revenues/ARR of > $3-5M are typically needed and a more solid understanding and proof of product-market fit can be demonstrated. You can prove that you have found your target customer, how you can go after that market, and what it takes to win against your competition. Using this knowledge, the money from the investors can help you scale the business and further enhance and build your product.
- Growth Equity Now you have found your groove and the business is scaling nicely. There is more to be done and you can supercharge your growth through geographical expansion, perhaps by buying competitors or complementary businesses to eventually build a very large business. The so-called growth equity investor has a sweet spot for this. They take some risks but typically invest in businesses with limited downside and a clear (ideally dominant) position in a well-defined market.
- Private Equity This is the big league. Here your business is ticking along, probably with a valuation of $100-200M+, growth has probably slowed to around 10-25%. Business is steady and with limited and manageable downsides. Significant value is built mainly through acquisition and efficiency, not organic growth.
Now you know where you should be aiming at when meeting investors, how do you know what you are looking for? The good news is: There is plenty of money around. The bad news is: It isn’t really about the money.
What does that actually mean?
It's All About the ... Interpersonal Relationships?
As Warren Buffet famously stated "You can't make a good deal with a bad person." The same applies to the investor. For me, it is all about interpersonal relationships, alignment, and true belief in your business idea. People buy what you believe in, not what you do.
There will of course be good and bad times when building a fast-growing business. The investor relationship will be tested along the way and without a strong and natural relationship from day one, it just won’t work and can quickly become very painful.
I met with a business recently who said that most of the investors they met asked them how they’ll become a unicorn. They wanted to build a really positive business serving both their customers as well as the open-source community. Becoming a business valued at >$1B was not part of their goal. They (rightly) turned them all away, bar the one who shared their vision. Finding natural alignment with your investor is super important -- and may sound obvious -- but people do get carried away in these situations, which may end up in disagreement later on.
There are a lot of good ideas out there but without belief and execution they go nowhere. Conversely, some average ideas can go a long way through sheer belief, drive, and determination. It is imperative that everyone -- including the investor -- fundamentally believes in the idea, the market, and the company. You must test this thoroughly before you proceed.
Partnering with the wrong investor can quickly turn the investment into a bad deal for you and, if you can, you should therefore wait and choose “no deal” instead if the fit isn’t there. You simply need to wait to find the right investor(s) for you.
On a Personal Note
I have joined DTCP (Deutsche Telekom Capital Partners) as a part-time Senior Advisor. DTCP focuses both on late-stage VC and PE investments in the B2B SaaS and services space. When I sat down with Vicente and the team, I looked for all of the above before deciding to join in terms of shared belief and alignment. Their belief in the impact that B2B SaaS will have on the corporate world with a focus on platforms around AI/BD, cyber, cloud infrastructure, and IoT/5G is 100% where I see things to be going. We are targeting what I believe is the confluence of a range of technologies which will shape the future for all corporations. Well-placed B2B SaaS businesses will have a significant role to play to enable this transition.
In the End
In the end it is down to the entrepreneur to create success and -- with the investor cheering you on -- providing advice, support, and of course the capital to help you succeed. At DTCP, we are very well positioned to do this.
If you own and/or run a business and would like to discuss how we can help, please contact me on firstname.lastname@example.org and I’ll be delighted to discuss your business, needs, and future plans.