Startup Guide, Part 2: When a Venture Investor Says No
Part 1
Let's talk about what to do between the moment when the investor refused to finance your startup, and the moment when you persuaded him or found another way.
Suppose that you have already done all the main things: developed a plan and a presentation , decided that venture financing was suitable for you , arranged meetings with qualified investors and presented a project to them . And you received a negative response.
One failure does not mean anything - the investor could have a bad mood, or a bad experience with another team from your field of activity, or with another team with a similar name, or with a team that had a leader like you or his Mercedes SLR McLaren in the morning the engine jerked - anything. Go meet other investors.
')
If you received three failures in a row - this may be a coincidence. Go meet other investors. If you received five, six, eight failures in a row - this is no longer a coincidence. Something is wrong with your plan. And even if he's fine, well, you still don't get funding. Continuing to meet new investors is a waste of time. Change your plan - and just about this article.
First, you need to stake out a place , so that was where to return. There is such an old, but true cliche, that investors rarely say no. Usually they say “maybe,” or “not now,” or “my partners are not sure,” or “this is interesting, I will think.” They say so, because in the current scenario, they do not want to invest in your company, but they want to leave the possibility to do so in the future if the facts change. And this is what you need - the opportunity to return to them with a new set of facts to convince them.
So be sure to accept the refusal politely. Ask them to make a review (most likely they will not do this, or they will not tell the whole truth - no one likes saying that someone else’s child is ugly. Believe me, I did it). Thank them for their time, and ask if you can call them back in case of any changes. Believe me - they want to say yes more than no, they need to invest.
Secondly, assess the current situation . In 1999, receiving a refusal is not at all the same as receiving a refusal in 2002. If you received a refusal in 1999, I am sure that you are a great person, and you have great potential, and your mother loves you very much , but with the plan clearly something was seriously wrong. If you were refused in 2002, you may have been the next Google, but most investors were hiding under the tables at that time and did not notice.
In my opinion, now (2009) our situation is more rational than those two extreme years. Many good plans receive funding, and some bad ones too - but not all bad ones. I would say that the time is now normal. But if again very good or very bad times happen, the material of this article will not be very useful.
Third, change the plan . This is the most difficult thing - to change the plan and purpose of the company in order to receive financing. To describe all the variety of factors that need to be considered, let me offer you an onion risk theory.
From the investor’s point of view, the risk associated with the investment looks like an onion. As the layers of the bulb, the risk is multi-layered and decreases gradually, in steps. Your job as an entrepreneur who seeks financing is to gradually remove the risk layers until the investor says “yes” - at a time when the risk is reduced so much that the investment does not look like a frightening action, but just risky. What are the layers of risk? Depends on startups, but on average there are the following.
Risk with founders . Is a good startup team? A regular team can include an excellent process engineer plus one manager - this is at least. Is an engineer so good? Is a manager so good to manage it? Is there a manager in the team? Or is there just the opposite, some businessmen, and there are no engineers at all?
Market risk . Is there a market for a product (we will use the word “product” on a par with the word “service”)? Does he need someone? Will you pay for it? How many? How do we know this?
Competitive risk . Are there a bunch of startups that already do the same? Is this idea quite different from existing startups, as well as from existing competitors?
Temporary risk . Is it a bit early? Is it too late?
Financial risk We will make an infusion, and how much more additional infusions will be needed before the company goes to self-sufficiency, and how much money is needed? How confident are we in the calculations?
Advertising risk . Will the startup break through the noise? How much will the advertising cost? Will the economy work for the profit from the client (money received from the client minus the cost of acquiring the client)
Risk of spread . Will any partners need to distribute the product? Will we get them? How? (For example, for mobile startups, a common problem is entering into contracts with mobile operators).
Technological risk . Can I create a product? Are there any difficulties in implementation? Rocket science, artificial intelligence, natural language processing? Do I need to make any breakthroughs? How confident are we that they will be made, or that this team will cope with this?
Grocery risk . If in theory a product can be created, will this team create it?
The risk of hiring . What jobs need to fill, will it work?
Risk with location . Where is the startup located? Will we find people there? Will the trip to my Mercedes SLR McLaren take more than 20 minutes?
When you put all these layers together and look at the whole bulb, you realize that this is a miracle, that in general some start-ups receive funding. What you need to do is to carefully examine each of these risks, and all the others specific to your category, and take the place of the investor. Understand what a startup can do to minimize or eliminate these risks. And then do it.
This is not particularly interesting, because you have to change your plan a lot, but look at the positive side: this is a great practice that will come in handy when you decide to create an open joint-stock company, and you have to describe all these risks and all the bad things that can happen to you. up to global warming.
Risk with founders . It's hard here. If you are a techie team, you have to consider the possibility that the investor does not consider your manager suitable for this role. Or vice versa, you are a manager, and the investor will find the techie not cool enough. You may have to replace or add one or two project founders. I am writing about this first of all, because this is a serious question, and the chances that you will honestly be told about this problem are small.
Market risk . Need to properly assess the market. Often enough detailed marketing research, but sometimes you have to go and find a couple of clients to demonstrate the presence of a real market. It is desirable a couple of customers who pay. Or at least those who authoritatively confirm the existence of a market to an investor.
Risk with competitors . Are your differences really so significant? Think it over again. Many startups are not very different from competitors, even after receiving funding. If you do not have a great idea about how you are very different from other well-known and unknown competitors, it’s better not to start a venture. In addition, two more mistakes about competitors, which start-ups usually make.
Never say that you have no competitors. This is a sign of naivety. Good markets attract competitors, and if you have no competitors, your market is not good enough. If you are sure that they are not there, take a few companies from neighboring segments and tell them how you differ from them.
And never say that you are going to achieve great success and take at least 2% of the market (albeit a very large one). This is also a sign of naivety. If your goal is 2%, then big companies will take the remaining 98% and just crush you. You should have ideas on how you will borrow much more than two percent of the market (I mentioned 2%, because this is a cliche. If you are an investor, you probably have already met with this).
Temporary risk - here you can only do something tangible, and show that you are not too early, and it’s not too late. The best option is to get a few customers.
Financial risk - consider how to calculate and think about whether it will not be possible to reduce the required amount of finance. For example, at the opening party, serve only Cristal, and discard Remy Martin “Black Pearl” Louis XIII cognac.
Advertising risk . Make sure your differences are clearly distinguishable. Without this, you simply can not shout down to others. Then simulate the economics of getting customers, and make sure you can show how customer income exceeds sales and marketing costs. This is a common problem for startups entering a small market. If it turns out that marketing will be too expensive, consider alternatives - guerilla marketing , or some kind of viral marketing.
Risk of spread . This is a difficult item. If your plan includes the need for distribution and entering into agreements with key partners - I would advise you to postpone it and do something else. Otherwise, you will need to first agree with the distributors before receiving funding - and this is practically unrealistic.
Technological risk . Here you can only make a product, or at least a beta version, and then collect money. The same for product risk.
The risk of hiring . You need to find out about what positions the investor is worried about and add them to the team. It will become more diluted, but here it is hardly possible to do something.
Risk with location . This is what you least like. If you are not in a large center, and you have problems with financing, you will probably have to move. That is why most of the films are shot in LA, and most of the funded technology projects live in Silicon Valley and in just a few other places. Where money is concentrated. You can start anywhere, but funding is not available everywhere.
You may have noticed that what you need to do is basically show more progress before you receive funding. There is a natural question - how to do it before you get the money. You can search for business angels (small risky investments in exchange for a small percentage of the company's income), work for money from first clients or from consultations, work in the evenings, inhaling somewhere else during the day, or quit your job and live on loans. Many entrepreneurs have done so and succeeded. Of course, many failed. And no one said it would be easy.
The most valuable thing you can do is create a real product. If in doubt, go this way. The second in value is to find customers. In the case of Internet service, show a constant increase in the number of page views from the presentation.
The whole idea of ​​venture investment is that investment is at risk. But at the same time, the investor is ready for a certain level of risk, so the best thing you can do to increase the chances of getting an investment is to reduce this risk. Peel the layers from the bulb. Once you have done this, change the presentation and present new facts. And go again to present your product. Repeat as necessary.
And, to finish on the positive, remember - “yes” can turn into “no” at any moment until the money is in your bank account. So do not turn away from other possibilities until the very end.
Part 3
Let's talk about what to do between the moment when the investor refused to finance your startup, and the moment when you persuaded him or found another way.
Suppose that you have already done all the main things: developed a plan and a presentation , decided that venture financing was suitable for you , arranged meetings with qualified investors and presented a project to them . And you received a negative response.
One failure does not mean anything - the investor could have a bad mood, or a bad experience with another team from your field of activity, or with another team with a similar name, or with a team that had a leader like you or his Mercedes SLR McLaren in the morning the engine jerked - anything. Go meet other investors.
')
If you received three failures in a row - this may be a coincidence. Go meet other investors. If you received five, six, eight failures in a row - this is no longer a coincidence. Something is wrong with your plan. And even if he's fine, well, you still don't get funding. Continuing to meet new investors is a waste of time. Change your plan - and just about this article.
First, you need to stake out a place , so that was where to return. There is such an old, but true cliche, that investors rarely say no. Usually they say “maybe,” or “not now,” or “my partners are not sure,” or “this is interesting, I will think.” They say so, because in the current scenario, they do not want to invest in your company, but they want to leave the possibility to do so in the future if the facts change. And this is what you need - the opportunity to return to them with a new set of facts to convince them.
So be sure to accept the refusal politely. Ask them to make a review (most likely they will not do this, or they will not tell the whole truth - no one likes saying that someone else’s child is ugly. Believe me, I did it). Thank them for their time, and ask if you can call them back in case of any changes. Believe me - they want to say yes more than no, they need to invest.
Secondly, assess the current situation . In 1999, receiving a refusal is not at all the same as receiving a refusal in 2002. If you received a refusal in 1999, I am sure that you are a great person, and you have great potential, and your mother loves you very much , but with the plan clearly something was seriously wrong. If you were refused in 2002, you may have been the next Google, but most investors were hiding under the tables at that time and did not notice.
In my opinion, now (2009) our situation is more rational than those two extreme years. Many good plans receive funding, and some bad ones too - but not all bad ones. I would say that the time is now normal. But if again very good or very bad times happen, the material of this article will not be very useful.
Third, change the plan . This is the most difficult thing - to change the plan and purpose of the company in order to receive financing. To describe all the variety of factors that need to be considered, let me offer you an onion risk theory.
From the investor’s point of view, the risk associated with the investment looks like an onion. As the layers of the bulb, the risk is multi-layered and decreases gradually, in steps. Your job as an entrepreneur who seeks financing is to gradually remove the risk layers until the investor says “yes” - at a time when the risk is reduced so much that the investment does not look like a frightening action, but just risky. What are the layers of risk? Depends on startups, but on average there are the following.
Risk with founders . Is a good startup team? A regular team can include an excellent process engineer plus one manager - this is at least. Is an engineer so good? Is a manager so good to manage it? Is there a manager in the team? Or is there just the opposite, some businessmen, and there are no engineers at all?
Market risk . Is there a market for a product (we will use the word “product” on a par with the word “service”)? Does he need someone? Will you pay for it? How many? How do we know this?
Competitive risk . Are there a bunch of startups that already do the same? Is this idea quite different from existing startups, as well as from existing competitors?
Temporary risk . Is it a bit early? Is it too late?
Financial risk We will make an infusion, and how much more additional infusions will be needed before the company goes to self-sufficiency, and how much money is needed? How confident are we in the calculations?
Advertising risk . Will the startup break through the noise? How much will the advertising cost? Will the economy work for the profit from the client (money received from the client minus the cost of acquiring the client)
Risk of spread . Will any partners need to distribute the product? Will we get them? How? (For example, for mobile startups, a common problem is entering into contracts with mobile operators).
Technological risk . Can I create a product? Are there any difficulties in implementation? Rocket science, artificial intelligence, natural language processing? Do I need to make any breakthroughs? How confident are we that they will be made, or that this team will cope with this?
Grocery risk . If in theory a product can be created, will this team create it?
The risk of hiring . What jobs need to fill, will it work?
Risk with location . Where is the startup located? Will we find people there? Will the trip to my Mercedes SLR McLaren take more than 20 minutes?
When you put all these layers together and look at the whole bulb, you realize that this is a miracle, that in general some start-ups receive funding. What you need to do is to carefully examine each of these risks, and all the others specific to your category, and take the place of the investor. Understand what a startup can do to minimize or eliminate these risks. And then do it.
This is not particularly interesting, because you have to change your plan a lot, but look at the positive side: this is a great practice that will come in handy when you decide to create an open joint-stock company, and you have to describe all these risks and all the bad things that can happen to you. up to global warming.
Some ideas for risk reduction.
Risk with founders . It's hard here. If you are a techie team, you have to consider the possibility that the investor does not consider your manager suitable for this role. Or vice versa, you are a manager, and the investor will find the techie not cool enough. You may have to replace or add one or two project founders. I am writing about this first of all, because this is a serious question, and the chances that you will honestly be told about this problem are small.
Market risk . Need to properly assess the market. Often enough detailed marketing research, but sometimes you have to go and find a couple of clients to demonstrate the presence of a real market. It is desirable a couple of customers who pay. Or at least those who authoritatively confirm the existence of a market to an investor.
Risk with competitors . Are your differences really so significant? Think it over again. Many startups are not very different from competitors, even after receiving funding. If you do not have a great idea about how you are very different from other well-known and unknown competitors, it’s better not to start a venture. In addition, two more mistakes about competitors, which start-ups usually make.
Never say that you have no competitors. This is a sign of naivety. Good markets attract competitors, and if you have no competitors, your market is not good enough. If you are sure that they are not there, take a few companies from neighboring segments and tell them how you differ from them.
And never say that you are going to achieve great success and take at least 2% of the market (albeit a very large one). This is also a sign of naivety. If your goal is 2%, then big companies will take the remaining 98% and just crush you. You should have ideas on how you will borrow much more than two percent of the market (I mentioned 2%, because this is a cliche. If you are an investor, you probably have already met with this).
Temporary risk - here you can only do something tangible, and show that you are not too early, and it’s not too late. The best option is to get a few customers.
Financial risk - consider how to calculate and think about whether it will not be possible to reduce the required amount of finance. For example, at the opening party, serve only Cristal, and discard Remy Martin “Black Pearl” Louis XIII cognac.
Advertising risk . Make sure your differences are clearly distinguishable. Without this, you simply can not shout down to others. Then simulate the economics of getting customers, and make sure you can show how customer income exceeds sales and marketing costs. This is a common problem for startups entering a small market. If it turns out that marketing will be too expensive, consider alternatives - guerilla marketing , or some kind of viral marketing.
Risk of spread . This is a difficult item. If your plan includes the need for distribution and entering into agreements with key partners - I would advise you to postpone it and do something else. Otherwise, you will need to first agree with the distributors before receiving funding - and this is practically unrealistic.
Technological risk . Here you can only make a product, or at least a beta version, and then collect money. The same for product risk.
The risk of hiring . You need to find out about what positions the investor is worried about and add them to the team. It will become more diluted, but here it is hardly possible to do something.
Risk with location . This is what you least like. If you are not in a large center, and you have problems with financing, you will probably have to move. That is why most of the films are shot in LA, and most of the funded technology projects live in Silicon Valley and in just a few other places. Where money is concentrated. You can start anywhere, but funding is not available everywhere.
You may have noticed that what you need to do is basically show more progress before you receive funding. There is a natural question - how to do it before you get the money. You can search for business angels (small risky investments in exchange for a small percentage of the company's income), work for money from first clients or from consultations, work in the evenings, inhaling somewhere else during the day, or quit your job and live on loans. Many entrepreneurs have done so and succeeded. Of course, many failed. And no one said it would be easy.
The most valuable thing you can do is create a real product. If in doubt, go this way. The second in value is to find customers. In the case of Internet service, show a constant increase in the number of page views from the presentation.
The whole idea of ​​venture investment is that investment is at risk. But at the same time, the investor is ready for a certain level of risk, so the best thing you can do to increase the chances of getting an investment is to reduce this risk. Peel the layers from the bulb. Once you have done this, change the presentation and present new facts. And go again to present your product. Repeat as necessary.
And, to finish on the positive, remember - “yes” can turn into “no” at any moment until the money is in your bank account. So do not turn away from other possibilities until the very end.
Part 3
Source: https://habr.com/ru/post/237561/
All Articles