I had the opportunity to attend a recent event at The Collaborative here in the Twin Cities. The Collaborative has been around as a support and networking resource for early stage companies since the late ‘80’s (www.collaborative.net). Recently, I’ve found that The Collaborative has been moving strongly toward a focus on the medical device industry, or the Green-Tech sector, and focusing less on other sectors. Med-Tech and Green-tech are certainly hot sectors for VC investment these days. Nonetheless, I was hoping that this event “Raising Private Capital” would hold equal value for the attendees from other industry sectors.
The title of the event drew the expected sizeable audience and, I was pleased to note, held true to its advertised promise of a more general approach. The information shared by the panelists regarding their fundraising experiences appeared to hit home with many of the entrepreneurs in the audience, particularly those currently raising funds to fuel their growth engine, or those that will be soon. What I noted, though, was that the panelists’ six recommendations were delivered in the context of key things to do when you’re ready to raise money. I was struck by the notion that the recommendations were positioned as activities to do in preparation for a fundraising effort, when, in fact, they are among the core tenets for building and running a successful business. These are the very areas that business leaders should focus their efforts, long before raising funding. At the very least, building a well-tuned engine on these elements will simultaneously help a founder receive maximum investment for their equity and increase investors’ return on the capital they provide. Everybody wins. Not having the work done on these key areas is analogous to asking a two-cylinder engine to pull an eight-cylinder load. It’s an uncomfortable ride, prone to breakdowns and wastes preciousfuel.
The six elements recommended were:
Define the problem your company solves: In seven words or fewer describe your target customer’s pain and how you solve it. For example, GrowthFire’s seven word vision is – “Transforming Technologies into Companies; Opportunities into Results”.
Quantify the market opportunity: Realistically, how many customers are there in your carefully defined target market? How much have prospects demonstrated they’re willing to spend on the problem you defined? Again, as an example, GrowthFire focuses on the estimated 20,000 North American-based software companies with annual revenue between $5 million and $30 million.
Invest in leadership: It takes a team to build a company, and investors often judge the quality of an opportunity by the quality of the leadership team the founder is able to build. Investors may not have the industry or product-specific knowledge you have, but they want to know that your team does, and that your team can develop and execute an appropriate strategy.
Clarify the business model: Define and refine your operating strategy, how you go-to-market and how you make money. Your model should describe the value you create, how you create it, and how that value is monetized.
Demonstrate execution: Investors like to back successful teams. Clearly demonstrating the ability to meet past objectives, achieve key milestones and drive results validates the first four elements outlined above.
Leverage your network: Communicate frequently with your board, advisors and stakeholders regarding your business results and upcoming plans. The best referrals to investors often come through relationships you’ve built in the past.
I frequently hear potential investors lament the absence of focus on these six areas. Your company may be ahead of the rest and firing on all but a couple of the cylinders. If you’re like most companies, you may be misfiring on four or more. Misfiring on any of the cylinders can cause a loss of momentum, and can require more fuel to make up the difference. Fuel for entrepreneurs is denominated in time, capital and equity. Since all are scarce or precious resources, an investment in ensuring your growth engine is well-tuned gives you a competitive advantage in your market, and a distinct advantage when addressing potential investors. It’s worth asking: Is your company firing on all cylinders?