Entrepreneurs, compute your odds of getting funded!

Light at the end of tunnel
LIGHT AT THE END OF THE TUNNEL!

A great read: Homebrew’s 1%: The VC Metrics Behind Investing in One of Every 100 Companies We Meet

This article gives a valuable under-the-hood look at typical investor’s “propensity to invest”. 3 key take-aways from this rare inside view are:

  1. 99 out of 100 opportunities evaluated are not funded!
  2. More than half of evaluated opportunities and 9 out of10 funded opportunities are ‘in-sourced’ – sourced from within the  close network of the investors.
  3. Less than half opportunities evaluated receive a chance to present their pitch in a meeting or a call and less than 2 out of 10 who get a chance to pitch get to the second meeting! So, if a founder of a new venture is meeting an investor for 2nd or 3rd time, she/he has already improved her/his chances of getting funded dramatically! Now, your chances to get an offer have improved from 1 out of 100 to 1 out of 7!

Of course, these are just the stats from one California-based investor. If you are in other less entrepreneurial-friendly parts of the world, the odds above would have to be discounted further. This article also does not state the typical time lag between identification of the opportunity and the ultimate offer. It is often long – sometimes more than a year! Time lag between the opportunity  identification and the offer is purposeful since it allows investors to observe if the venture is, in fact, making progress towards the end-goal.

Typical Start-up Mistakes

Thin IceIn Typical Start-up Mistakes, Andrew Schrage mentions five typical entrepreneurial mistakes as: (1) lack of research, (2) lack of budget and money-saving plan, (3) too much reliance on outside funding, (4) inadequate use of social media, and (5) expanding too early.

If you ask 10 successful entrepreneurs their 5 top reasons for failure, they may come up with 11 different – and sometimes, contradicting – lists. All the reasons listed by Andrew are noteworthy, yet to some extent incomplete. Take for example, lack of research.  Often, entrepreneurs suffer from BAD research and not lack of it! Man is, by nature,  self-aggrandizing animal … we love our own ideas to the extent of being delusional. For the fear of proving ourselves wrong, we shut out all push-backs we receive from prospective investors, advisers, and well-wishers – or, even those we notice during our own research. An entrepreneur needs to seek critic – should be hungry to hear push-backs. But that rarely happens. 

The most important – almost fundamental – reason for a start-up failure is lack of revenue focus. I have seen technocrats over-engineering their products without any sped-to-market issues touching their brilliant minds. Very few think of diluting their idea a bit to get to market early and putting some revenue dollars on the books. It is not all about the volume of dollars that flow in your pocket by hitting the market early. It is more about experiencing the process of selling and servicing customers! The pains revealed by that process teaches an entrepreneur many valuable lessons early on. Better incur cost of learning early on, rather than waiting to blow up the shuttle in the middle of your flight! Of course, it is also about locking in a market before the competition notices you.

Another frequent mistake that have brought down many a promising start-ups is an entrepreneur’s ego. When a founder becomes bigger than the venture, he loses the game! An entrepreneur needs to recognize the needs of a venture – be it cash or talent – and be ready to dilute herself/himself if it helps the venture (and as a result, her/his holding) grow.

7 Tips on How to Predict A Newborn’s Graduate School Transcript: Of course, A New Venture Business Forecast!

Grad_babyHave you ever wondered the prudence of a VC asking a start-up founder for a five-year (or even a three-year) financial forecast? Creating a START-UP BUSINESS PLAN & FORECAST is like writing a newborn baby’s future graduate school transcript … in the world infested with very high infant mortality rate! Well, then here are some tips that to do precisely that:

1.  Logic – not numbers: While creating a start-up business forecast, journey is more important than the destination! Ask yourselves if you have considered every driver that impacts 4 financial quadrants – revenue, costs, assets, and liabilities. Test the underlying logic while projecting the famous (notorious) J-curve. Don’t forget to factor in all required costs and capital expenditure required to achieve those fabulous revenue projections! Accuracy of logic is more important than the precision of numbers!

2. Decide on a single business trajectory: Do not forecast every possible trajectory that your business can possibly take. Decide on a clear focus and chart out a business forecast for only those activities that you would undertake in initial years. Do you want to build a product business or a service business, will you be a wholesaler or a retailer, will you sell directly or through distributors, etc. Decide on the dominant path and model that path alone.

3.  Address break-even and scalability: Readers of a start-up business plan look for guidance about the economic promise and risks that the venture offers. Understanding regarding entrepreneur’s plan to reach self-sustainable state (a financial break-even) is a key risk measure. How many months would a start-up take to break even, what are the management’s plans to make that happen, and how much fuel will it burn to reach that stage are the key questions that readers would seek answers to. Once they are comfortable with the answers that the plan provides, the next question would address the potential upside offered by the venture and that depends on how fast the venture can scale its revenue model?

4. Err on the “negative side”: It is OK to have ultimately overestimated your cash needs. In fact, it is better to do so rather than showing a Supercalifragilisticexpialidocious forecast to please potential investors, only to run out of money before achieving targeted milestones. In later case, the entrepreneur invariably ends up losing his or her company! This business forecast is about planning your business and not about convincing the investors.

5. Market is not a “thing” … it is a live beast!: Recently, I met an entrepreneur who was advised by some pundit to price his offering in a manner that will result in super-normal gross margin to attract investments. I am not sure how many investors would buy such a pricing scheme. First, such pricing is possible only in a monopolistic situation and monopolies are rear to find now a days. But even if sit was feasible in short-run (say, due to the product being of unique value), it is naïve to believe that no competitor will ever chase such attractive business proposition in long run. Never think of competition as a static force. It is a live beast that will react to your decisions!

6. Make customers the focal point of your plan: If you can convince a customer to buy your product, you can convince an investor to invest in your business. A business plan that is built on the basis of an early engagement with “anchor customers” becomes way more defensible than one built on theoretical assumptions.

7. Do not turn your sail with every breeze: Business forecast is the entrepreneur’s plan … not of a prospective investor. One should, of course, take all relevant inputs from experts (especially, from other entrepreneurs who have ‘been there, done that’) before you finalize the business plan. However, once you freeze it, do not keep modifying it with every suggestion that you may receive. Revisions should be well thought-out and done only to reflect strategic changes in direction of your venture.

Related content:

The Big Lie of Strategic Planning by Roger L. Martin in Harvard Business Review (may require registration for full access)

“Focus your energy on the key choices that influence revenue decision makers—that is, customers. They will decide to spend their money with your company if your value proposition is superior to competitors’. Two choices determine success: the where-to-play decision (which specific customers to target) and the how-to-win decision (how to create a compelling value proposition for those customers).”

[ORIGINAL IMAGE COURTESY IMAGERYMAJESTIC/ FREEDIGITALPHOTOS.NET]

Biggest source of funding for most startups is actually surprising | VentureBeat | Entrepreneur | by Meghan Kelly

So, it is clear that if you (and your close circle of family and friends) cannot help your venture in its early days, no one else will. The VentureBeat data does not surprise me at all. It is unfair for a total stranger take a leap of faith and write a check for you without (a) that “angel” has not had a chance to observe you and your time for some time and (b) does not see your own “skin in the game” (sorry for the cliche!).

Biggest source of funding for most startups is actually surprising | VentureBeat | Entrepreneur | by Meghan Kelly.