Here’s the scenario. After securing your first investors and then having a flurry of activity over a couple of months (see related article titled “The Domino Effect of Fundraising”), you reach something like 75% of your fundraising target and hit a brick wall. You still had a handful of interested investors but none seem to be making a decision. Because the fundraising process was taking longer than you thought, you dialed down the activities to about 20-30% of your workload so that you could focus more badly-needed energy on the company. Now what?
The principles covered in this article apply to an equity round of funding with a large lead investor or a seed round with a bunch of angel investors. The issue in both cases relates to reaching the downhill slope of the round (towards your funding target) and then getting stuck.
Don’t Spend It ‘Til You Got It
By the time you’re reading this article, it might be too late. But please don’t ratchet up your expenses to a level that assumes you’ll reach 100% of your fundraising goal. What happens if you don’t reach that goal?
For sure you have some chance of making it, and many do. But many fall short by reaching 50-75% of the goal and getting stuck. If you end up in this last category, but have already added expenses (one-time or recurring), you could find yourself having to unwind. With one-time expenses, it’s too late. So you’ll have to look at recurring expenses, with personnel being the most likely because most of the other recurring expenses you added probably don’t add up to near as much as personnel. It’s not fun asking someone to leave the dream you sold them just a couple of weeks before.
If you’re reading this article before dialing up your spend to the full amount, I have some advice. If you are desperate to spend in a some key areas, make your decision assuming you won’t bring in any additional funding than what’s already in the bank from your fundraising efforts. You might decide to include fully-committed investments that haven’t yet funded but you are at least 90% sure they will.
You might also create a couple of spending scenarios. If you only reach 50% of your goal, what will you go ahead and do? What about 75%?
First, you should do some soul searching on the need for the rest of the funds that would get you to your original goal. With at least a couple of months having gone by since you initially set the target amount, you should now have several additional data points. Have you validated some new and important aspects of your offering or business model? If you’re generating revenue, have you missed your forecast or exceeded it? Does your resource/staffing plan still seem valid? Have any new risks or opportunities entered the equation? You get the idea. Startup time flies by and a lot happens in just a single week, not to mention each month.
Questions like these should help you determine if the original fundraising amount is still critical to reach. If so, then you’ve got some work to do. In this situation, I commonly recommend flipping your workload back to 80% fundraising and 20% company operations. Pedal to the metal, cycle back through the remaining interested investors. Use your existing investors and advisors to help close some of them.
Discover The Key Inhibitor
Find out specifically what concerns the remaining investor prospects have or the additional information they need to make a decision (see related article titled “Getting to Closure with an Interested Investor“). But put a check mark in either the “definitely no” or “definitely yes” column for each one. Those ratings are for this round of funding. In other words, you might get some investors to admit that you’re just haven’t reached their sweet spot for investing but they could be interested in future funding rounds.
Along the way, make sure to understand why investors aren’t opening their check book because anything that comes up more than once should be put on a list of things you need to work on. I’ve published my list of common inhibitors/issues here.
My favorite question to ask is this: “What is it that you’d need to see for this to be an exciting investment opportunity?” It is an open-ended question that can’t be answered with a simple yes or no. Better yet, it mostly forces the investor to reveal what their major concerns are. Once they give you an answer, don’t just write it down and walk away. Instead, do the following:
- Voice back to them what you understand they said. This gives them a chance to correct your understanding.
- If they weren’t specific enough, then get them be more specific. Here’s an example:
- Investor: “I’d like to see you gain more traction than you currently have”
- Founder: “I understand, you’d like to us to increase our monthly revenue. Is that true, and if so, what level of monthly revenue would be exciting to you?”
- Address their concern right then, if it’s something you can address. The investor might have been confused about something or incorrect in their assessment of something
- Ask the question again: “In addition to reaching $__K in monthly revenue, is there anything else you would need to see for this to be an exciting investment opportunity?”
Hopefully you see how valuable this follow-through is to understanding where you really stand. It’s a standard sales process, but translates to the fundraising process equally well. That’s because fundraising is a sales process. You are selling your team, your company and the opportunity for the investor to make a huge return on their investment.
What if it Doesn’t Work?
If this additional effort doesn’t return results within a couple of weeks, you’ve got to reassess. Just like you do when faced with surprises (ie – lack of validation) on your product or other aspects of your business, you will need to adjust your expectations, plans and/or resources based on the fundraising you’ve achieved. And hopefully you haven’t been spending lately based on the assumption that you would reach your goal (see related article title “Don’t Spend Your Fundraising Goal Until it’s in the Bank”).
Make sure to keep focus on specific accomplishments or milestones you can reach that will significantly benefit you the next time you enter the fundraising phase. If you did the right job of discovering the inhibitors, you should know exactly what to assign the priorities to.
Shutting it Down
One more thing. If you decide to stop your fundraising efforts short of your original goal, let it be known that your round is closed and you are execution mode. This doesn’t mean you can’t let a late-coming investor write a check. But from a perception standpoint, startups that appear to be perpetually fundraising seem like they are failing. Instead, “close the round” and execute like crazy so you can show enough new traction and other milestone achievements to raise money again in the future.