14 Things That Shorten the Time to Angel and Venture Funding
This post continues my notes from the New York Venture Summit on July 21, 2011 — in particular, the panel entitled “The Venture Roadmap: Making Sure You’re Headed in the Right Direction and Advice on how to effectively shorten your time to Angel and Venture funding.”
Although presented with the question “How to shorten the time to funding”, what this panel actually gave you was a list of basic requirements for equity funding by organized angel investors or venture capitalists. This saves you time because if your company is not a good fit for this kind of investor, then you’ll be wasting a lot of time making presentations to them.
So what’s a good fit for organized angel investors and venture funding? Here is a list of company attributes that make a good fit for these classes of investors, as stated by the panel:
- Team — The executive team has more than just the innovator or inventor. Usually, we want to see a CEO or president with management experience and domain expertise in addition to the innovator or inventor.
- Large market niche — The available market niche is in the 100’s of millions of dollars or more.
- Disruptive — The product or service must be significantly innovative or original — not a copycat company.
- Value at the exit is known — There are comparables to estimate the value of an exit (similar companies that have exited recently).
- Believable exit strategy– There are specific companies for which a strategic purchase of your company is a reasonable strategy.
- Reasonable capital to exit — The amount of capital needed to reach an exit potential is within the normal range of the angels or VC’s you are presenting to. This includes subsequent rounds of funding needed.
- Wholeheartedly seeking capital — If you are presenting your company just to fish for possible funding, it’s not likely you’re going to get a serious response.
- Realistic go-to-market plan — You have a realistic, believable plan to reach your sales goals in the first few years, a plan that you and your team could actually carry out.
- Reasonable valuation — We discussed this in a prior post recently. Valuation is not usually based on your sales, but is based on how much of the company you are willing to sell to receive a certain size investment.
If you have any question what a disruptive innovation looks like, begin by reviewing the book “The Sorcerers and Their Apprentices” by Frank Moss, former Director of the MIT Media Lab. This great little book illustrates innovations that will shake the world in a few years.
Several other key attributes that organized angel groups and venture funding generally want, but were not mentioned in this panel include:
- Growing market niche — Not only is the market niche served by your company large, it is growing.
- Sustainable advantage — There are significant barriers to entry such as patented technology, meaningful first-mover advantage or alliances that make it difficult for competition to quickly copy what you are doing.
- Domination of market niche — Due to your product’s uniqueness (competitive advantages) and barriers to entry, you expect to dominate your market niche.
- Pressing need or problem solved — The product is a “pain-killer” rather than a “vitamin”, addressing a pressing need or solving a clear problem, rather than something nice to have.
I obtained these requirements directly from the internal screening scoresheet used by the San Diego chapter of the angel group to which I belong, so I know this is factually accurate. What you still might be wondering is the relative importance of each of these requirements and a more detailed discussion of each one with examples. I hope to cover these issues in future blog posts. Your comments and questions on this blog are also welcome.
The stage of company development is also important. Unlike in the late 1990’s and early 2000’s (dot-com gold-rush), ideas that exist only on paper are rarely funded today. Organized angel investors and venture capitalists (those that invest in startups) usually require that a new startup be either ready to begin shipping, or if not ready yet, able to prove that the market is interested in your product or service – at the price level you are proposing – and a prototype can be shown. It is rare that angels or VC’s fund “science projects” — i.e. laboratory efforts to develop a new technology that exists only in theory at this time.
There are exceptions to the above. Some angel groups and venture capital firms have funds available for “seed” projects. These are usually smaller amounts of capital (typically up to a few hundred thousand dollars at most), needed to complete development of a product. Another exception are products with very large market potential and compelling barriers to entry — such as a new pharmaceutical (drug) — where grant-funded technology can be shown in the lab but human trials have not begun. It’s important to note that most organized angels and VC’s will still require market validation — real evidence that when completed the product will be accepted in the market.
Key takeaway: How many of the 14 attributes does your company or startup have? Take the time to assess the ones your company does not embody. If there is a match, be sure you can show that to potential investors. If there are too many non-matches, consider other types of funding.
Feel free to contact me with questions on this topic at firstname.lastname@example.org