The Two or Three Things You Need to Raise Capital

Yesterday I chatted with an entrepreneur that was looking for advice on raising capital. I’ve written quite a bit about fundraising in the past, but it’s a hard topic and a challenging thing for people to get through. Most people have never raised funding before, and even with all the advice out there it’s still a scary, black hole.

While speaking with the entrepreneur (which was through Clarity btw) the basic question was this: “When should I raise capital and what are investors really looking for?”

There’s no easy answer.

Investors look for all sorts of different things based on their own experiences, preferences, what’s hot right now, and so on. But I highlighted four things that critical, of which, I’d argue, you need at least two or three. Here they are:

  1. Past success. If you’ve successfully exited a company before, there’s a very good chance you can raise money again. Investors like to back past winners, and will often reinvest in founders that they previously made money on. First timers, of course, can’t play this card. Go to #2.
  2. Unfair advantage. This is a hard one to quantify, most companies at an early stage don’t have an unfair advantage, but I would specifically look for one of two things: (a) fantastic, never-before-seen technology; or (b) industry insight that no one else (or very few others) have. These are two key differentiators that can lead into genuine unfair advantages. If you don’t have one of these, you’re going to get hammered on how you’re different than the competition.
  3. Vision. In a Lean Startup world, vision occasionally gets lost. I’ve argued that vision and Lean Startup are actually symbiotic, but I think many early stage companies don’t really have a compelling vision. A truly inspirational, world-changing vision isn’t something you can fabricate out of thin air, but if you can share a future that your startup helps create and people believe in, you’ve got something meaningful. Incidentally, riding a trend is helpful but is not really meaningful enough in this category. For example, we know everything is going mobile, but saying that you’re going “mobile first” doesn’t count as a vision.
  4. Traction. Traction rules everything. If you have traction, you may be forgiven on past experience, unfair advantage and vision. Your unfair advantage might be the traction, although the bar for traction is constantly going up (10,000,000 is the new 1,000,000), so don’t assume that you can get away with traction alone. Ultimately though, most startups don’t have significant traction when they try and raise capital. And without it, the other three better be there in a big way (or at least the unfair advantage and vision.)

If you can hold off on raising significant capital in order to build up traction, do it. Traction trumps everything else. If you can’t wait, or traction is something that’s going to take a long time (and/or requires the capital to get) then you need to have at least two of the other items I’ve described above. In some cases, I’m pretty sure super successful entrepreneurs can raise capital without anything else, but that’s a rarity.

Note: I didn’t mention team here. It didn’t come up in my conversation with the entrepreneur but it’s very important. Investors always look at the team and decide whether they can make a bet on the people. Past success is an indication of team quality, but so are the other things as well. If you have an unfair advantage, a strong vision, and/or traction, it’s very likely you have a solid team as well. In some cases the team is the unfair advantage because of their experience, insight, market knowledge, talent, past success, etc. So team is critical.

I also didn’t mention the market you’re going into. Investors care about large markets but having a large market without any of the above things won’t matter. It’s easy to say, “We’re targeting this multi-billion dollar market,” without really understanding if that’s true, if anyone in that market cares, or if you have any legitimate access or know-how into that market. So yes, big markets do matter, but it’s more of a “given” than the points I’ve described above.

For first-timers or entrepreneurs that haven’t hit a home run yet, focus on vision + traction. The traction proves you can execute and march in a direction quickly, and you’ve started to crack a real nut; the vision proves you’re actually going somewhere compelling.

October 24, 2012 Posted in Startup Fundraising by

  • http://twitter.com/pkorpak Piotr Korpak

    Well written Ben, thanks. For the first-timer like I am, the last paragraph was a bit of relief I must admit. Though #2 on the list is also doable, just requires time.

  • http://twitter.com/byosko Ben Yoskovitz

    Thanks Piotr, glad you liked the post, best of luck with your startup.

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  • http://www.Spidvid.com/ Jeremy Campbell

    It really is all about traction, and it’s a delicate balance between science, art, passion, persistence, testing, tweaking and timing!

    Great post Ben, thanks so much for writing it!

  • http://twitter.com/byosko Ben Yoskovitz

    Thanks Jeremy, glad you liked it.

  • rsamuels

    Great post Ben.

  • http://www.startupcitybali.com/ StartupCityBali

    Thanks Ben. And +1 for traction.

  • http://twitter.com/byosko Ben Yoskovitz

    Thanks, glad you liked it.

  • http://twitter.com/byosko Ben Yoskovitz

    Thanks for reading and commenting. Appreciate it!

  • MJGottlieb

    Great insights Ben. I think your point on holding off significant capital contributions until you build traction is spot on. I think that is where seed capital and some small angel and friends and family money can come in handy. The equity given is small (if any) or possibly it can be a small debt transaction with an option to buy in (or transferred) later at a discounted price. I have found that you have to prove there is marketability (traction) not only to your investors but to yourself as people smell your confidence, and hopefully that confidence has come with the proper amount of due diligence. I think a lot of people find that they don’t have the marketability they thought they did. If they find this beforehand, it’s far easier to tweak the product or service and test the marketability until its viable. If however, the person looking for the investment took the product or service out to investors before this was done, it is infinitely harder to re-open those doors. (This is only my opinion from my own experiences of course) Again, great post- MJ

  • http://twitter.com/byosko Ben Yoskovitz

    Thanks MJ – appreciate you stopping by and commenting.

  • http://twitter.com/jacktiantai Jack Tai

    Ben, as always, great article and insights.

  • http://www.microsourcing.com/ MicroSourcing

    Past success can increase your chances of raising capital from a number of funders because it shows that you have a good track record of making business ventures grow.

  • http://twitter.com/Dzordzh George

    Tnx Piotr!

    —————–

    Most popular museum in Russia. Hermitage museum tour!

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  • Adams Asamoah

    your posting has been educational for a first-timer like me. thanks for spending time to write.

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Ben Yoskovitz
I'm VP Product at Codified (makers of VarageSale).

I'm also a Founding Partner at Year One Labs, an early stage accelerator in Montreal. Previously I founded Standout Jobs (and sold it).

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