5-4-3-2-1 Countdown for Entrepreneurs (2/8/23)
5
Elements of effective fundraising
RESPECT. Whether it’s a preliminary chat with a prospect or a formal presentation to a group of investors, you begin by expressing respect. But that means more than just thanking them for their time and interest. It often requires you to do some research about them in advance, so you can appropriately acknowledge their experience, knowledge, and the nature of how they invest. And, of course, respect should go both ways. If you feel disrespect from them, chances are good you won’t want that prospect as an investor.
CONFIDENCE. We shouldn’t mistake humility for a lack of confidence, just as we don’t view arrogance as impressive confidence. But when you speak with genuine conviction because you have real expertise and product proof, you’ll have the kind of confidence that makes people more receptive to hearing about your Unique Value Proposition.
STORYTELLING. The idea that all marketing is storytelling has become a cliché. And too many founders when making pitches seem to think “narrative” means sounding like the narrator of an infomercial. To be engaging, you must tell your “story” in an original way. While there’s no formula for scripting a captivating story, you can start brainstorming by considering the basic elements of a story: setting, character, plot, conflict, and theme.
LISTENING. Whether you Zoom with a potential investor or pitch in person, there will be dialogue. They’ll have questions and you’d better have good answers. But the secret to listening is not to just be thinking about what you should say in response. You want to truly hear what a questioner is saying in a lead-up to the question, or a PS to the question, or pregnant pauses or their tonality.
Such things may sound extraneous, but they are revealing. It’s tempting to hear a topic and start recalling what you wanted to say if asked about it, but you’ll be more persuasive if you speak to the questioner’s underlying concerns, not just their query. So “listen up”: listen at a high level of interest.
PERSUASION. Fundraising is all about persuasion. And it’s not just presenting facts; it’s also appealing to emotions. Yet there is more to it than just making a convincing case. There are four other “P” words you should try to master:
Persistence. If rejected by a prospect, you need to quickly recover and move on to other prospects, or find ways to circle back when ready.
Patience. While the old sales motto is “ABC, Always Be Closing,” that attitude can be counterproductive. People resist aggressive salesmanship; they see through most pressure techniques. So be patient when prospects need more time to ponder your proposal. And realize that the more you suggest a pressing need for funding, the less likely you are to get it.
Personality. Yes, there’s such a thing as a “winning personality,” but it depends on what people admire in others. So, if you’re not as gregarious or witty as others, that’s fine -- just be genuine. When it comes to fundraising, “winning personality” means people trust you and want to work with you. Charm is nice, but authenticity is better.
Preparation. Do research on your prospects in advance of pitching them. They’ll appreciate that you cared enough about them to learn more. And you will be better able to anticipate their questions.
4
Choices that matter in a startup strategy
In a MIT Sloan School of Management blog, “Ideas Made To Matter,” Meredith Somers lays out “4 choices that matter in a startup strategy”:
· Intellectual property strategy
· Architectural strategy
· Value chain strategy
· Disruption strategy
3
Principles to create a startup’s “Unique Money Model”
Every startup needs a Unique Money Model – a financial strategy based on its realistic needs and aspirations, not the conventional planning of an already-established business.
I’ll be explaining this new concept in upcoming newsletters, but I’ve shared some of the underlying principles in recent issues. If you click on the links below you will see how startup CEOs need to think differently to become cash-centric and achieve profitability.
· Startup CEOs should begin to create a UMM by answering my min/max question:
“What is your minimum outcome for ‘success’ and what is the maximum risk that is acceptable?”
· Startups should focus on outcomes, not on exits.
· Startups should focus on their assumptions, not their projections.
2
Perspectives on technology
“Technology is anything that wasn’t around when you were born.”
— Alan Kay, computer scientist
“Science and technology revolutionize our lives, but memory, tradition and myth frame our response.”
— Arthur Schlesinger, historian
1
Critique of the startup ecosystem
As we look at the economy today, we see a huge, missed opportunity: the vast majority of new ventures do not achieve long term success. This outcome is treated like it's inevitable. "Eh, startups are risky; better luck with your next one." Well, I call BS. I think the failure rate of startups is far higher than it should be.
Part of the problem is that the startup ecosystem promotes a fundraising-centric approach more than profit-centric entrepreneurship. It is more investor focused than market focused.
It’s understandable that the startup ecosystem is dominated by what investors want. But investors usually answer to their own investors and have frameworks and timeframes that are different than the founders and CEOs. And few players care about near-term profitability.
Why? Because small, early profitability often doesn’t lead to outsized returns for a venture capital fund. It doesn't do what is necessary to create a few big wins to offset a bunch of failures, which is what a venture capital fund wants for its “success.”
In a strange way, these funds actually “want” some companies to lose. If a meaningful proportion of these ventures aren’t failures, that means they weren’t that risky – and they didn’t have the potential for outsized outcomes. Assuming an investor can’t predict the future, if their portfolio sees 80% or 90% of the investments succeed, that’s not in line with the risk VCs are expected to be taking.
Some shareholders in their fund will say, “What are you doing? If I wanted returns like this, I would open a savings account. Talk to me about the few huge winning investments you made. I don't care about the rest.”
“The rest” flame out because, to keep investors happy, they took outsized risks... and paid the price. That’s the game — That’s the startup ecosystem model.
I realize this critique may be controversial, or at least contrarian, so I might as well go further and argue that the startup ecosystem turns many CEOs against being entrepreneurial. Startup CEOs are conditioned to listen to prospective investors more than to their prospective customers. They worry more about their fundraising than about generating real revenue and achieving early profitability.
Based on the rules we play by now, based on the assumptions people hold true, if you want to build a venture somewhat slowly -- which means maybe you can't quit your job right away -- well, that's no fun. That's not exciting.
The mindset? “I’ve got to quit my job and try to raise a million dollars quickly. If it doesn't work, I’ll chalk it up to a really interesting experience, put it on my LinkedIn and find another job.”
That’s the mindset. It is not: “I’ll go through a testing phase, and bootstrap. It'll be my own money, and I’ll have a slower overnight success, but I’ll generate a lot of valuable metrics, acquire very little outside capital and give up little of my company. Maybe I’ll even pass it to my kids someday.” That is an uncommon ambition. Very few would dare frame it that way. It’s not daring enough to be interesting; not interesting enough for investors.
But an early-stage venture doesn’t have to sound like a mission to change the world. Maybe being entrepreneurial and striving to achieve early profitability is daring enough.
Stay safe, stay happy, stay in touch!
Adam
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