The possibility of raising less money than expected
Founders should be prepared for the possibility of raising less money than they expect. In a fundraising scenario, if a founder only raises $15 million when they were expecting to raise $25 million, this is something they should anticipate and pla[...]
Rebecca Mitchem is a partner at Neotribe Ventures, a venture capital firm that invests in early-stage companies. I had the pleasure of meeting Rebecca recently and was impressed by her vision for the future of venture capital. She believes that VCs need to be more hands-on with their portfolio companies, and she is working to make that happen at Neotribe. I believe that Rebecca is a rising star in the venture capital world, and I am excited to see what she will achieve in the coming years.
As we continue to see economic changes, we are also seeing a change in the amount of capital that companies are raising. Whereas before companies would try to raise large sums of money, we are now seeing more companies scaling back and only trying to raise the minimum amount they need. For example, a company that originally wanted to raise $25 million may now only try to raise $15 million. This shift is likely due to investors becoming more cautious with their money and only wanting to invest in companies that they feel are more likely to succeed.
As a founder, you are responsible for the overall vision and direction of the company.
The natural reaction is to feel very frustrated. It's possible that if you had raised capital six months ago, the $25 million would be sitting in your bank account now, which feels unfair. You're allowed to take a minute to complain to your co-founders, existing investors and families. However, don't let this setback stop you from achieving your long-term goals. Use this as motivation to continue working hard and proving everyone who doubted you wrong. With perseverance and dedication, you will eventually succeed.
It's important to remember that even though fundraising may be difficult right now, it's still possible to be successful. Companies have raised smaller rounds in the past and gone on to be very successful. The most important thing is to remain focused and solvent.
As an entrepreneur, it's important to always be thinking about how to optimize your business in terms of both raising capital and using that capital effectively. This process is never static, but is always evolving as you receive feedback from investors. By staying attuned to these two areas, you can ensure that your business is always moving forward.
There are a number of ways to optimize the amount of capital to raise for a business.
No matter where you are in your capital raise, there are steps you can take to optimize the process. If you haven't started your raise yet, you can research which investors are most likely to be interested in your company. If you're already mid-raise, you can focus on building relationships with potential investors.
If you haven't yet gone out to raise capital, take the time to reevaluate your expectations. It's important to be realistic about how much you can raise, in order to avoid losing potential investors. Start by throwing away your old financial model that assumed a $25 million raise. It can be difficult to revise your plans if you're anchored to your prior goals and expectations. Starting with a clean slate will help you focus on what's truly important for driving your business forward.
As you rebuild your business model, it will be important to have a more specific conversation with your existing investors to understand how much capital they have available to support you. For example, if you determine you need $15 million to run the business and continue strategic growth initiatives, but your existing investors only have $5 million of capital available, then you will be looking to raise $10 million from new investors. This can be more attractive for new investors than considering a $25 million round without knowing if the existing investors are supportive.
If you're already in the middle of a raise, you should likely complete the same two steps above - especially if you're getting negative feedback on the amount you're trying to raise. This will help ensure that you're on the right track and that your raise is successful.
Asking for what you want can be tough, but it's important to remember that it's okay to change your mind. You're not the first person to do so, and you won't be the last.
If you come back to potential investors with thoughtful responses about the changes in your model and projections, many will be willing to entertain the conversation from a new perspective. This is a great opportunity to show that you're flexible and willing to adapt to feedback, and that you're still committed to making your business a success.
Founders and key management should always keep an eye on dilution, but it may be worth it to take an extra $1 million if available. This can help to ensure the success of the company in the long run.
As a news article, I would encourage entrepreneurs to negotiate for a second close when they have a term sheet in hand. I believe that this can help them attract additional investors, including strategic investors who may take longer to commit. Having a lead in place can help generate additional demand for the round and help the entrepreneur close the deal.
As a business owner, it's important to make the most of your capital. After all, that's what allows you to grow your business and achieve your goals.
It's time to optimize your capital for maximum returns. But how do you prioritize where to make investments?
The main goal when it comes to financing a startup is to extend the cash runway as long as possible while still keeping the business afloat. A good rule of thumb is that the financing should provide the company with 18 to 24 months of runway. This is typically enough time for the company to hit a meaningful milestone to increase the company's valuation or make it much more attractive to potential investors. If the $15 million can actually buy you 24-plus months of runway, you may want to instead consider investing more in key areas, which will in turn reduce the runway slightly.
There is no one-size-fits-all answer when it comes to deciding where to invest company resources. However, if a company is finding that its salespeople are consistently generating strong returns on investment, it may be worth investing more in that area. Alternatively, if a company could invest a reasonable amount of capital to meaningfully increase its gross margins, that could also be a worthwhile option.
As a startup, it's important to always be learning and growing. After all, the whole point of a startup is to create something new and innovative. That means that when you're raising money from investors, you have to be open to feedback and willing to learn from it. In this case, the feedback from investors wasn't positive enough to get them excited about the company. This is a valuable lesson, and it's worth taking the time to figure out what went wrong and how to fix it. That way, you'll be better prepared for the next round of fundraising.
In today's business environment, it's important to be able to adapt to change. The macroenvironment may be out of your control, but it's up to you to make sure your company is able to navigate through it. Be nimble and remember that some of the most successful companies come from volatile times.
The information provided in this paragraph is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
The Forbes Finance Council is an excellent organization for executives in successful accounting, financial planning, and wealth management firms. I highly recommend joining if you qualify. The benefits of membership include access to exclusive networking events, educational resources, and industry-leading research.