As I mentioned in my first post, I just completed a quick consulting engagement in PA. Some of the regional economic development folks arranged for me to come in and sit down with CEOs of early stage businesses, economic development leaders and the service professionals that round out the entrepreneurial ecosystem. Over the course of three days, I met individually with 10-12 CEOs. My mandate was fairly ambiguous so I made it a point to lay out expectations and goals at the onset of each hour long session. Their objectives ranged from assessment of business model and VC fundability to pitch deck evaluation. Many simply wanted to know if they pass the sniff test. Over the course of these sessions, a few themes emerged that I will speak to over the course of a few blog posts.
With the exception of two, each CEO was simply not asking for enough money. Their asks ranged from $50,000 to about $250,000. In the current market environment, characterized by extremely tight credit markets, tumbling home values, a stock market that can't seem to find a bottom, a dead IPO market and a dearth of M&A activity (read, no exits for VC-backed companies and no liquidity for LPs) early stage technology companies need working capital. Remember, cash, or more specifically, the lack there of, kills emerging businesses. I suggest having enough cash to cover your current/expected burn for 18 months. Theme number 1, entrepreneurs aren't aware of their capital requirements. It seems many entrepreneurs believe that asking for $50,o00-$250,000 improves their chances of finding an investor. The reality is that asking for $50k is like asking for $10M. In either case, you are catering to the margin. There simply aren't many sophisticated investors willing to look at a deal of that size. The other reason for asking for such a small sum is the hesitance to give up ownership. The reality is that these ventures, with few exceptions, had very little chance of succeeding without significant operational assistance. They need hands on board members with operational experience. At the end of the day they have to ask themselves the following: would you rather have 100% of a grape or 50% of a watermellon?
Just like in the public equity markets, there is natural flight to quality in the private equity world. Many funds that were raising didn’t get it done and have since shut down. I can think of one in particular. Others are suffering with defaulting LPs not meeting capital calls. Still others have changed their going forward strategies. For example, a fund that had planned to invest in say 4 or 5 new companies may instead choose to reserve those funds for follow-ons with existing portfolio companies. Those portfolio companies will likely struggle to bring in "new money" so existing investors will be forced to shoulder the load. So, what does this all mean? Well, there is very little money available. Those with capital are in the drivers seat and can afford to be very picky. As such, only the best of the best will find smart money in this market. We're talking serial entrepreneurs with prior exits, with novel, defensible technologies in markets exhibiting venture economics. If your offering lacks any of these traits I would suggest bootstrapping.
If it takes 3-6 months to raise money in a traditional market, it can easily take twice as long today. If you are able, I would suggest focusing on your business instead of on fundraising. Fundraising is a full time job for a CEO and few businesses can afford to have the leader spend their time away from their primary function. Theme number 2, unless you have an A+ offering and you need the money, focus your attention on your business rather than fundraising.
I'm just getting started here. Stay tuned with more thoughts from my PA adventure.
No comments:
Post a Comment