Thursday, August 26, 2010

Funding Your Startup: Are You a Zero or a One?

By Akira Hirai

Startup funding is a binary event. In the binary language of computers, a zero represents the “off” state and a one represents the “on” state.

When I say that funding is a binary event, I mean that there are only two possible outcomes: either you succeed in getting funding, or you don’t. You win or you lose – there is no second place. All or nothing.

If you are an entrepreneur seeking capital to grow your business, let me explain why this simple concept should drive some important choices you will need to make.

Chances are, acquiring capital is an important part of your growth strategy. Many elements must be present to create a successful venture, and capital is usually one of them. If you don’t succeed at raising capital, there’s not much point in trying to build the business.

It should be obvious, then, that you should do everything in your power to maximize your chances of raising the necessary capital.

This means you need to do two things. First, you must create a venture that an investor will want to invest in. Second, you must communicate the opportunity to potential investors in the most compelling manner possible. Value creation and value communication.

Value creation is about filling a real need in the market in a way that allows you to enjoy some sustainable competitive advantage. This is what entrepreneurship is all about.

Value communication is about helping capital providers see the “Aha!” moment quickly, before they lose interest, followed by a clear and thoughtful expression of the value you’ve created. This is usually in the form of an elevator pitch, an executive summary, a pitch deck, a financial forecast, and a business plan.

Every shortcut you take in value creation and value communication reduces your chances of raising the capital you need to execute your vision.

Most funding sources – both investors and lenders – have a nearly endless supply of deals to choose from. They have no incentive to try to fix a flawed deal. They are looking for obvious reasons to say “no” because that moves them closer to the bottom of the haystack. And once they say no, they almost never give you a second chance.

You may think you’re being smart by cutting corners and saving a few bucks here and there. After all, until you’ve secured outside capital, you’re still funding things out of your own pocket. Thrift is usually a good thing.

But think about this: if you do things on the cheap, there’s a much greater chance that you’ll never get that outside capital. That means that everything you’ve put in up to that point – your time and money – will have been wasted. Poorly executed value communication gets you nowhere.

As an entrepreneur, one of the many things you’ll need to become very good at is picking priorities. You need to assess risk vs. reward; cost vs. benefit. Some things, like legal matters or the business plan that serves as the foundation of your venture, are worth doing well. They are investments you need to make in your venture before you’ll get an outside investor to take you seriously. If you hire an outside vendor to help you, be sure to check credentials and track records, and hire the best person you can.

Fund raising is a tough game. You want to do everything you can to be the “one” and not the “zero.” If you’re going to do it, then do it well and give yourself a fighting chance. All or nothing.

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Today's guest blog is by Akira Hirai, founder of Cayenne Consulting, a firm that helps entrepreneurs prepare for the fund raising process by developing strategies, business plans, financial forecasts, and presentation materials. His website is http://www.caycon.com.


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15 comments:

  1. "Every shortcut you take in value creation and value communication reduces your chances of raising the capital you need to execute your vision."

    "But think about this: if you do things on the cheap, there’s a much greater chance that you’ll never get that outside capital."

    The author tries to use the same point both as a conclusion and as evidence while stating it as a fact. The whole clumsy collection of poorly segmented paragraphs near and between these two quotes destroys the structure of the article, imo.

    The author would come closer to accomplishing his/her objective by supplying two real world examples (one a shortcut in value creation and the other a shortcut in value communication) that seemed like a good ideas to the under-experienced entrepreneur, but in truth, cost dearly.

    At least then we'd be able to tell the difference between "applehood and mother pie" and this. ;-)

    ReplyDelete
  2. Nice article, thanks for sharing.

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  3. Akira,
    Very true, but you didn't factor in the fact that most entrepreneur's are doing this because of a pure lack of any other funding options. So going on the cheap isn't an option it’s a fact of the current economy for many seeking funding.
    The problem I see today is that investors are just like the banks. If you have a $1M they will lend you $100K. If you can afford to hire consultants and other experts in today’s market place you are in great shape. But if you are next the great inventor of the next killer app, and you have no money, don't expect any investor to help you. They are looking for BULLET PROOF.
    Entrepreneur's are everywhere because many of them are the newly (last 24 Months) unemployed. They are using their own funds, and many of them have never put a presentation together. Many of them have great ideas, but have no idea how to covey the value. They can't afford to go first class, so they opt to attend as many free classes as possible that do now more than teas, because they are offered by companies looking for customers that can afford the help.
    So your statement is true. Investors expect/want you to have money and be able to present a world class business model. The problem with that in today's real world market, is people still have great ideas, but they don't have the money to promote them at the unrealistic level investors are expecting.
    Bottom line, it’s understandable that investors want a professional, top shelf presentation. With a business plan submitted on premium paper, that addresses every aspect of the business. While at the same time showing YOY growth in the double digits, but it’s not practical anymore.
    We are in a depression, and yes I said we were in DEPRESSION, so investors shouldn't blow off the ugly looking business plan written on a bar napkin. Instead look at it, consider it, because it may have been submitted by the next Steve Jobs, Bill Gates, or Henry Ford.
    Looking for perfection means you have lost your ability to see a diamond in the rough.

    ReplyDelete
  4. Some good advice here and there. I would like to see more info about how to create value and techniques of value communication. Write more!

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  5. yeah u suck just anoyter scam to make you money is what ive seen from this

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