Don’t Try to Get Funding Before You Know How It’s Done

If you don’t know how the process works to raise capital and get funding from angel investors or venture capital investors, you will never succeed at raising capital. What this means is that if you feel like raising angel investment or venture investment is critical for the success of your business, you need to go out and learn how the process works. There are tons and tons and tons and tons of resources out there on this subject. Read them all. And then read more. It will take awhile, but it’s worth the time. Either you’ll realize that raising capital isn’t something that’s going to happen for you (or it’s not necessary or right for your business), or you’ll decide it’s absolutely the right thing to do and you’ll be better prepared to do so.

I get quite a few questions and requests for help in terms of how to raise financing. I don’t mind – I think it’s great that what I’ve written to-date on this site encourages people to reach out. But here are a few problems I see with most of the queries, and hopefully by answering all of these publicly it will help people in the future:

  1. Cold-pitching investors rarely works. This is really the same principle as cold-pitching prospects. What’s the percentage success of cold emails or cold calls? Most of the time it’s not very good. I’d have to say it’s even worse in the case of raising capital.
  2. Investors won’t sign non-disclosure agreements. This has been said before, but it needs repeating. No investor will provide you with a “guarantee of confidentiality”. It’s just not going to happen. So get out there and pitch the crap out of your idea. And hone that pitch until it’s perfect.
  3. Don’t try and raise money if “you don’t know what to do next.” Investors put money into the people first. So the most important thing in most investments is the people involved in the company. If you’re going to admit to an investor, “I need money because I don’t know what to do next,” you’re basically telling them you’re incapable of running the business. Money doesn’t provide all the tools to run a business, only one.
  4. Don’t try and raise money if you don’t know any investors. This is of course tied with point #1 above. The best way to raise money is to get involved in the local startup community, build up your own brand (and the brand of your startup) and connect with as many entrepreneurs and investors as possible. See point #3 too – Investors invest in people. So if they know you, like you, and trust you already, your chances just went up. You can get to investors through entrepreneurs (who have raised money), as well as service providers like lawyers and accountants who do business with the investors. You have to figure out the world of personal branding, social capital and leverage.
  5. Raising money can’t be a precursor to starting your business. It’s very difficult to raise money when you haven’t started anything. You should really be focusing on starting your business, testing your hypotheses, getting customers and key metrics that help validate what you’re up to. Then give it a try. If raising money is your first step, an step two is start the business, you’ve got the steps in the wrong order.
  6. Play your odds and be realistic. One of the key reasons why point #5 is so important is because so few deals are ever completed. Angelsoft has some great statistics on this: In the last 12 months out of 21,562 submissions to their system, 496 deals have been completed. That’s a 2.3% investment rate. So those are your odds. They might be a bit higher, but even at 3% your odds of raising capital flat out suck.
  7. Learn how to sell. Before you go to raise money do as much as you can to become a master salesperson. If you can’t sell and/or can’t effectively (and passionately) communicate ideas, you will have a very hard time raising capital.

The process of raising capital – from angel investors or venture capital investors – isn’t rocket science or a total mystery. Help is out there. There are some very clear things that you need to know, learn and understand as fully as possible before you even begin the process. The more prepared you are, the better your chances of success. Good luck!

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  • Amanda Fern

    I like number seven. Learning to sell is a very difficult skill to master, but when salesmanship is mastered, it is instantly recognizable and easy to support.

  • Amanda Fern

    I like number seven. Learning to sell is a very difficult skill to master, but when salesmanship is mastered, it is instantly recognizable and easy to support.

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  • Anthony Onesto

    Question – how do you go about starting a company/idea, if you don't have the cash. Point – how can you open for business without cash or investment?

  • Benjamin Yoskovitz

    Anthony – There's almost always a financial commitment of some kind. It's very difficult to start a business with $0. If you have $0, you might try and save up some money to make it happen. Or start something on the side while working to help pay the bills.

    Raising capital is obviously an option. And I'm not against raising capital. But you simply can't succeed in raising capital if you go out and say, “I have no money but this great idea. Give me money.” It just doesn't work that way.

  • Web Design Services

    I like no3, 6 and 7.Very useful tips.IMO these are the most important point for the investors.

  • Jim

    Understanding the process is useful, but understanding more about the investor is more important. Angel Investors and VC's have somethings in common but. for the most part, are very different. It starts with investing your own money versus investing other peoples money to what happens when a portfolio company exists.

    So, you can learn about them by following blogs especially with VCs. There are over 60 active VC bloggers. For a comprehensive list check out the blogroll on Brad Feld and Jason Mendelson's Ask the VC blog.

    You can learn a lot about Angels by checking out the Angel Capital Association's site or at the University of New Hampshire's site where they follow Angel investors.

    Now reading about investors is one thing but the very best way is to find out about investors is to be around them. So, find out what events are in your area that investors frequent. Being in Southern California, there are quite a few monthly sessions where you can rub elbows. Most investors will take the time to answer questions and talk about what is important to them.

    As a side, you will find out their process as they talk about themselves and their investment group.

  • Simon Raybould

    Let's go big time on the little point hidden within big point number two – pitch the crap out of your ideas.

    But speaking as someone who trains people to make pitches, for Heaven's sake don't pitch until you CAN'T pitch it badly. It's not a question of “can get it brilliant” it's got to be “can't NOT be brilliant” because in the cold light of day, when the nerves hit, you'll screw up if you can.

  • Benjamin Yoskovitz

    Simon – I've written quite extensively about pitching —… — it's definitely an important part of the process. And generally what I've found is those people who know what they're getting into with investors, and what they want to see, etc. are also those that are ready to pitch.

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  • Benjamin Yoskovitz

    Jim – I agree completely that before going to raise money you need to know how investors think and act. You need to interact with them and learn more about them, so you can present a tailored pitch, just like you might tailor a sales pitch to a customer.

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