Twists and turns of start-up funding path
Most entrepreneurs dream of the moment when they get to send out that press release announcing they have struck a funding deal. Usually involving millions, it’s a great, rock-star moment for the entrepreneur and a milestone for the start-up.
For employees at the startup, it’s a sign of validation, of success and of growth to come. The sad reality, however, is that most start-ups never get there.
Before a big venture-capital (VC) injection, most start-ups need to go through a type of funding ladder, with each rung representing a journey of credibility as the entrepreneur progresses. At the beginning, most start-ups are bootstrapped or self-funded. If they get through this stage, they go through seed funding rounds involving “friends, fools and family” — those most likely to buy into your entrepreneurial vision with least due diligence.
As the start-up grows, entrepreneurs often move to angel funding – cash from wealthy individuals typically smaller than that of VC.
Start-ups mostly come from nothing, and tech start-ups in particular feature disruptive or outlandish business models. Credibility is built over time by following a funding path that shows people are buying into you. A venture capitalist will look for these building blocks.
Legendary venture capitalist Keet van Zyl says he looks for five qualities in start-ups before investing. First, there has to be a solid investment case: a good product or service with a competitive advantage, a large market for the start-up, a strong management team, and a scalable business model.
Second, he says the team needs to be comprised of “awesome people”. People often forget that business is all about people. When we work and partner with others, we want to enjoy what we do — and a startup investment is a long journey to success.
Third, there should be a strong culture. In Van Zyl’s words, the company culture needs “to be solid” to celebrate the successes as well as survive the setbacks. Business gaps can be solved with investment and coaching, but “the one thing you can’t fix with money is a toxic corporate culture”.
Fourth, there needs to be execution capability. There is a common phrase in the start-up world that “ideas are worth nothing”. The value of an idea without any execution is nothing, as most ideas are refined or completely changed (a pivot) when they are applied in the real world.
Last, there has to be proven traction, some element of momentum that can be demonstrated or quantified.
But there is actually another stage, arguably the most important of all, and it comes right at the beginning. It’s the very first deal an entrepreneur does when the founder team comes together in partnership. That first deal shows a VC that the entrepreneurs managed to convinced each other of the idea and closed their first important sale. There are exceptions, but it’s the reason VCs prefer teams rather than single founders.
It is also primarily a risk thing: if something happens to one founder, there is a back-up plan — the other founders. Diverse founder teams are generally more effective than individuals, so VCs see themselves investing in a more productive structure. This also passes Van Zyl’s “awesome people” test, showing that a founder can get on with fellow humans and will be receptive to outside influence and coaching.
Once you have the nod from the venture capitalist, expect everything to take some time. The VC may draw out an engagement to get to know you, finalise the due diligence exercise, watch your business develop and see if some of those claims you make actually show hints of coming true.
The entrepreneurial funding process is a journey. Don’t be in a hurry. Credibility takes time.