Sure, raising money for a startup can be a challenging process. More often than not, it’s loathed by founders and viewed almost as a necessary evil. This is why founders happily hire advisors to help them in the venture capital process (it costs them more than they realize). They want to get in and out of the money-raising days as quickly and easily as possible — not a great mindset for such an essential aspect of growing a business… and it often leads to the founder having little to no connection with her shareholders.
If you stop and think about what that means, it’s pretty crazy: The founder, the first owner of the business, doesn’t really know the other owners of her business…misalignment.
Raising money should be a strategic endeavor for founders and involve forming new, long-term relationships. If adequately vetted, early shareholders (seed and Series A) can be among your company’s greatest assets. But, to get the right makeup of shareholders, at a minimum, founders should know their investors’ risk tolerances, expectations, and time horizons — banks call this KYC (know your client) — to ensure they can deliver. One of the most significant stresses for founders who’ve raised capital, particularly in the early days, is misaligned expectations from shareholders and dealing with the consequences.
All of your prospective investors/shareholders are motivated by getting a return on their investment. This is capitalism, after all. However, WHY they choose to invest in your company depends on how they view your venture.
What I mean is, are they looking at your startup as a BET; or, are they investing because of a BELIEF in what you’re building?
Shares in startups, generally speaking, are illiquid financial assets. Patience is needed from your shareholder base — a rare commodity in the current economic environment. As a founder, you want a shareholder base of proverbial HODLers. Stellar business development will inevitably lead to liquidity for shareholders and at a higher valuation than they invested. But it takes time to grow a business. Believers will grant you that time.
When pitching, do the prospective investors have a genuine curiosity about your industry and venture? This is important and should be evident from the questions they ask…
If investors want to talk shop and get into engineering, market demographics, or the competitive landscape, there is a good chance they could become believers in what you’re building. On the contrary, investors who are focused on your VC list and who else is coming in on the round are simply looking to pass the due diligence buck… they invest based on the reputation/work ethic of other investors. These are bettors, not believers. These types of investors have numerous other startup investments in their portfolio (typically have a mandate to deploy capital), and in 6 months, they may barely remember your name.
Believe it or not, bettors are the most common startup investors. Their first questions go like, “how much have you got committed already?” “who is your lead order?” And so forth. They’ll spend more time on your cap table slide than they do on the product pages within your deck. There’s a time and place for these investors, no doubt, but it’s not in the early days.
If shares of your company are relatively liquid (meaning: there is some sort of pent-up demand on the sidelines for shares in your venture), it’s okay to take on the bettor type of investor. If they grow impatient, they can exit their position. But if there is no liquidity, typical in the startup phase, and the bettor wants out, it can create stress and potentially a sinking valuation for your company, depending on how large their share position is.
Bettors are good because they don’t require much hand-holding. They’re merely looking for a return. Bettors are bad because there will almost always be a supply of your shares available for sale, and they aren’t evangelizing your story as believers will.
Believers are great because they help create an environment ripe for a rising valuation if you deliver on projections.
It’s frustrating to see founders view money raising as a necessary evil. That mindset will eventually lead them to hire outside help to raise capital in the early days — which often leads to a disconnected shareholder base, consisting largely of bettors. Founders need to embrace the money-raising adventure and hand-pick who they want as fellow owners in their business. In the early development days, you need a shareholder base of patient believers.