With the growing amount of available information and data and the increasing prominence of angel investor and private equity networks, early-stage investors are much more experienced and sophisticated than at any time in the past.
Startup entrepreneurs, therefore, also need to be at the top of their game when it comes to raising early-stage capital.
Nobody knows this better than Ed Quattlebaum, a biotechnology entrepreneur and consultant who has raised millions of dollars in startup capital for his and his clients’ businesses. His company, Polaris-Crux Group, is a strategic advisement firm based in the Washington, DC, area that focuses exclusively on helping emerging-technology companies and investors navigate the complexities of early-stage innovation, the raising of capital and commercial scaling.
Recently, Quattlebaum spoke at the Clemson Technology Village Conference, an annual meeting of the Clemson University-backed business and technology incubators around South Carolina. In speaking to his extensive experience in raising capital for young and promising technology companies, Quattlebaum set a few sobering expectations for startup entrepreneurs who all too often are under the mistaken impression that they are ready for early-stage funding.
Here are five of those observations about the current state of the early-stage investment environment:
1. There is only one “Golden Rule.”
While there may not be a secret formula for raising capital, Quattlebaum emphasized that there is one standard truth all startups should understand: “He who holds the gold rules.” In other words, money rules, and investors will always have leverage over a startup, especially one with inexperienced and untested entrepreneurs, as is often the case.
For this reason, it is vitally important to make sure that you have experts and professionals on your side when preparing to seek early-stage capital for your business. Business incubators and mentors are great resources that are readily available and typically free. If the budget allows, consider hiring professional services that can coach and guide you through the process. The lesson: If early-stage fundraising is unfamiliar territory for you, do not go it alone.
2. Early stage investors are partners.
Early in a startup, there are typically very few investors. For this reason, any early-stage investor will essentially become your partner. More than likely, you will not structure a deal as such, but for general purposes, you should be prepared to treat these investors accordingly.
With that said, startup entrepreneurs should remember that investors who understand your technical space and the market you wish to serve, and have a strong network in your field, are worth their weight in gold.Those who offer only capital with none of these other benefits, however, will become your worst nightmare. The lesson: Choose your early-stage investors wisely and adopt the adage, “Beggars must be choosers.”
3. Your early investments are gone.
Any investor you find will not allow his or her capital to be used to pay off old debt. While this strategy is actually sound – new capital should be used to grow the company, not correct past decisions – it leaves the entrepreneur in the tough position of negotiating old payables and keeping previous stakeholders satisfied while continuing to grow the business.
With this in mind, entrepreneurs need to understand that any money that they have put into the business, and that of any family members or friends, will more than likely be written off. The lesson: You and your early investors should be focused on growing the value of your remaining equity stake.
4. New investors will expect a better deal.
As you continue to grow and consider later rounds of fundraising, you will more than likely be approaching angel investors or venture capital partners who will be significantly more experienced and sophisticated. They will do their due diligence, review your previous investor deals with excruciating detail and ultimately negotiate and demand a better deal than previous investors.
For this reason, it is essential that you pursue early-stage investment deals with diligent fortitude. You should avoid pursuing investment when you are in a pinch and in need of capital, fast, as this scenario will lead you to make desperate deals driven by emotion rather than logic. The lesson: To avoid significant roadblocks in the future, put as much due diligence into the early-stage investment deal terms and structure as you do the investors with whom you later engage.
5. There is only one first impression.
These days, especially in smaller communities and regions, investors join groups and networks much more often. Some would argue that only networked investors provide real value to startup entrepreneurs. Regardless, these networks are constantly communicating and, though they are competing for deals, they understand that transparency and collaboration is far more effective than navigating the vast sea of startups alone in order to find the winners.
With this in mind, it is critical that startups prepare to pitch their businesses long before even starting to pursue capital. The last thing an entrepreneur wants is to present a great idea with an unprepared pitch, only to waste the time of and be rejected by a reputable investor. The minute your business is denied, it becomes infinitely more difficult to find capital from other investors, all of whom will undoubtedly hear about your lousy pitch through their network. The lesson: Take your time, know your business top to bottom, don’t rush your pitch and make sure you consult with experienced professionals who will help you along the way.
The investor network for early-stage startups is easier than ever to find and penetrate, but securing investment has never been more challenging and risky. Startup entrepreneurs need to be prepared to pitch their ideas, ready to answer questions and reduce risk and never rush into an agreement without a thoughtful and diligent understanding of investor deals and expectations.
What do you think? Do you have other insights that you can share with entrepreneurs seeking early-stage investment? Please share them in the comments section below.