In the world of startups, the process of raising capital is overly glorified by the media and in popular opinion. The reasons that this individual piece of the puzzle commands such mind share are straightforward:
- It’s visible: this is one of the few activities that startups engage in that outsiders can follow.
- It’s understandable: the results — at least at a high level — can be easily consumed and understood by a general audience, even when the underlying businesses and technology cannot.
- It facilitates measurement: the benchmarks of amount raised and valuation have a normalizing effect. Fundraising milestones allow for the comparison between any two companies, even if they are from disparate industries and have no parallel attributes.
- It’s entertaining: think of Mark Cuban on “Shark Tank” or any of the business plan or pitch competitions which are so prevalent at business schools and conferences.
The reality of fund-raising is that it’s just another gate in process of starting and growing a company. Completing a successful funding round is intrinsically no more important than other milestones (as described in a prior post) such as finding a good product-market fit.
That said, raising capital is often necessary. Building a complicated and involved product requires money.
There are several conventions regarding how startups and investors communicate and interact. The standard starting point for the fundraising process is the pitch — a several-minutes-long presentation of a handful of slides which distills the company’s progress and future plans to an easily consumable message.
Predictably, the process has taken on a life of its own. Entrepreneurs often spend inordinate amounts of time to get really, really good at the initial pitch; this is frequently detached from, or even at the expense of, real, substantive company progress.
In line with this, I would guess there are far more resources for entrepreneurs on creating a perfect pitch deck than conducting insightful customer research, designing great software user experiences, financial modeling, or other activities which actually drive business value. By way of example, the Google search return for “startup pitch deck” is pages deep with tips, tricks, and advice on how to achieve fundraising success.
The process often gets upside down, with the focus (and the rewards) placed on the entrepreneur’s ability to craft and communicate a story, rather than on the company’s underlying fundamentals.
I wouldn’t say that I hate doing the industry-standard pitch, but it plays to neither a personal nor a company strength. Want me to present ten slides that show Gain Compliance’s value and prospects in a succinct and compelling manner? Chances are we’ll both be disappointed by this conversation. So, in most cases, I simply avoid these situations.
A far more successful approach — and one in which we’ve found great, value-added investors along the way — has been initial conversations that typically last an hour (or more), and ideally include several founders. We typically start with the team and our backgrounds before delving into the technical business problem we’re solving — data quality challenges in insurance compliance reporting.
Often, we don’t even have slides or diagrams or any visual aids during this initial discussion; those are follow up items included in the twenty-page business plan and financial models that are delivered afterwards. (While the full-monty business plan is a bit of relic in today’s fundraising process, it’s something I still like and use.)
In contrast to the persuasiveness and excitement through the conventional pitch deck, our conversations are more about competence and a thoughtful approach to a difficult problem.
Done well, success at fundraising is a by-product of creating a real and valuable company. If a start-up has strong fundamentals and a compelling story, even an unconventional or poorly-delivered pitch conveys this value effectively.
One caveat to this post: in one of the rare exceptions to Gain’s stated approach, I did present to a fund (FIN Capital) using a conventional pitch deck and it’s how we started a process that ultimately resulted in some of our favorite investors — the proverbial exception that proves the rule.