Given that fund raising is of particular interest to entrepreneurs, I have split out Money 2.0 from Bootcamp (kinda like a VC product extension…).

One of my readers in Germany asked:

"I have been enjoying reading your blog along with the blogs of a few other VCs and one question keeps nagging me. It appears as if the VC community looks primarily for investment opportunities in businesses where there is little to no competition and/or the core idea is quite revolutionary…[what about those that] focus on measured improvements."

The key driving force behind the early stage venture model is the need to hit a 10x return on capital if the idea works. Because about 60% of venture deals either break even or lose money, the winners have a significant burden to overcome. Around 30% of deals come in around 3-5x and it is the 10% (one out of ten) that drive the return and needs to be 10x.

As a result, early stage VC’s need to find opportunities which can swing for the fence. A company with a "measured improvement" unfortunately can not break out of the pack fast enough to garner market leadership and an exponential return. For new technologies to be adopted and to leap-frog incumbents, they need to be exponentially better (cost, efficiency, performance, etc). It is the only insurance policy. For service plays, the features and experience must be significantly better.

There is also an intangible factor that makes one deal backable and another not. I can’t quite explain it, but it usually revolves around the management teams aura and ability to communicate the vision. In the end, most venture plays rely on hope and aspiration to get launched. Just as there are some presenters who can wow crowds…Guy Kawasaki for example, there are some teams that are masters at sprinkling the pixie dust. I’ll save, for another day, what constitutes elements of a good pitch (big market, great team, super economics…simple right?).

As the firms get bigger, execution becomes more and more critical. Toyota, Apple, etc are examples of companies that, while not revolutionary per say, are masters at delivering great customer experiences. However, early on, it is hard to convey superior execution when all you have is a business plan. This is where "revolutionary" helps. This is why venture only makes sense for a small portion of new businesses.

"I am out here for you. You don’t know what it’s like to be ME out here
for YOU. It is an up-at-dawn, pride-swallowing siege that I will never
fully tell you about, ok?"
                                  — Jerry Macguire

So, you all keep reading about how much money is floating around out there and how dysfunctional our business is becoming and yet, you are hitting wall after wall raising money. What the hell is going on? When is someone going to Show You the Money?

The Knife Edge: Here is the truth…raising venture capital is boolean. There is a knife’s edge (pretty dull) and you either fall into the a) next New, New Thing bucket or b) "Yes, But" bucket. In the New, New Thing bucket, you are the market leader (or #2 or #3) in a hot space that is going to be worth $10B according to Gartner. Your analogs are getting snapped up for $600m by News Corp or maybe you go IPO. VC’s are stumbling all over each other and you will likely raise too much money at a wacky valuation.

Yes But: Or, you are like vast majority of the real world, you are in the "Yes, But" bucket. This means, you start many of your presentations with "Yes, XYZ is in our space, BUT we have a better solution" or "Yes it is difficult to sell to municipalities, BUT we have a new, proprietary approach". In other words, you have a promising company in either a traditional or emerging space and while you are better than the incumbents/competitors, it is noisy and outside parties can’t readily discern your market leadership. You have steak but no sizzle. To make matters worse, you are probably selling into markets that have traditionally spooked investors (municipalities, insurance co’s, doctors, hospitals, manufacturing, etc).

Listen: So, what are investors going to do? They are going to look at your business. They are going to tell you that you have something promising and to stay in touch. And then, they will give you (if you are lucky) a handful of "issues" that need to be overcome. This could be showing that doctors in a region will adopt your service in mass or that insurance agents will use your tool (in numbers). In other words, they will give you milestones. Instead of ignoring these (because the VC doesn’t understand your model), take them seriously. Creating a plan that allows you to start addressing these in a capital efficient manner.

Know yourself. Be prepared for this brick wall if:
1) a lot of the efforts before you ended up in the graveyard or scaled slowly
2) there are few large companies doing what you are trying (scalability)
3) there are large incumbents with predatory practices in your market
4) your customers are not easy to sell to
5) other efforts have had to raise significant sums to get to the finish line

Show Me the Money: How do you raise capital in these situations? Couple of ways:
1) strategic capital: if there are customers who love what you do, some may be willing to prepay for services or even invest in the firm
2) angels: friends, families, businessmen from the industry, etc who believe in what you do. Lock down on lead (say $500k+) and the rest come around.
3) placement agent: if you are raising enough money, institutional sources are possible. They will likely introduce you to the same hedge funds and venture capitalists that you would have gotten to. Don’t expect any magic investors that are "unique". However, it saves you the time and effort of running the process. As my friend, Patrick Dealy say "spend your time making money vs. raising it".
4) sector focused funds: find VC’s that have been active in the space. Look at firms in your general space and see which funds put capital into them (avoid those funding your competitors).

Patterns: So, realize that for the vast majority, this bubble isn’t going to make your life any easier. It only applies to the funny money deals. It may mean that there are more angels coming out from under rocks (which is good). And, don’t let it frustrate you. Realize that the investor business is about pattern recognition. If you look too much like something that was previously painful, it is hard to change opinion without proof points. Good Luck.