Startups can be quite fragile, and one of the most difficult challenges they face is to raising funding in order to make sure they reach profitability. Money is difficult to come by, because there are so many founders competing for the same slice of the pie. Funding is a tricky problem, not just for founders, but for investors as well, because they have so many different options to choose from, and are not sure how to pick the winners.
The in the room is valuation. What’s a number which would be fair to both founders and funders ? While we would like to pretend that it’s a science, based on calculating the present value of future discounted cash flows, in reality it’s much more of an art. There are so many intangibles involved that it’s hard to come up with an accurate figure, which means that two different investors would look at the same startup and offer a completely different valuation.
While most founders are quite happy to accept money from whoever is willing to give it to them, what happens when they are in the fortunate position of having a choice? Should they go for the investor with the better brand name? Or should they select the investor whom they think will add more value because of his domain expertise? Or should they choose the investor who gives them the most money?
There are no easy answers, and its best to think of it as a game. The funding game is a complicated one, but you need to learn how to play it. Investors have an advantage because they have more experience and have played it many times before. Entrepreneurs need to learn the ropes, and will make lots of mistakes while figuring out how the game is played. They need to understand the ground rules, either by talking to other entrepreneurs; by reading books; or by getting advice from mentors who can guide them. However, there are no hard and fast rules. A lot of it depends on luck and timing. How much money is available in the coffers of investors? Have they just raised funds from their general partners? Is the economy flush with liquidity? How much are other companies being valued at? Are you in a hot area?
Fund-raising needs to be played both as a dating game, as well as a mating game. In the speed dating game, you need to talk to lots of different funders as quickly as possible, so that you get some sense of how much interest there is in your company; what your competition is; what your options are; and what your chances of raising funds are. This will help you come to terms to reality very quickly, when you realise that you are not the only act in town, and that investors can be quite hard-headed and dispassionate. Every time you have a conversation, you become a little smarter, as you learn more about the world-view of funders, and learn how they see the world.
However, once you start getting serious, you need to evolve to playing the mating game , because you are looking for a long-term partner, not just for a girlfriend. The perfect funder is someone who will stick with you through thick and thin – someone who will help your company to succeed, not just by providing money, by offering access to all the ingredients which a startup needs in order to succeed.
Game theory can be quite helpful to help you get up to speed. Learn more about the strategies which have been developed to tackle the famous ” sultan’s dowry problem”, so you can apply fast and frugal heuristics intelligently to a mutual sequential mate search strategy ! This will help you figure out what the optimal number of funders you need to pitch to is, before you can select the one who’s right for you.