Three Challenges to Startup Funding

Three Challenges to Startup Funding
Tim Taylor

Fast Forward Strategy Group LLC

POSTED: 12.16.03 @00:45

The current state of the entrepreneurial/investor community can be best described as a junior high school dance: two groups separated, awkwardly curious and a bit unsure about how to take the first step to boogie.

In today's early stage investing world, I see three things stopping the music:
1. The investors are often not ultimately the customers (ironically, at times their children are).
2. CEOs are often not attentive to feedback on their pitches given by investors who often speak in unfamiliar words.
3. CEOs often believe they must know/do everything.

However, as we are coming upon a time where M&A activity will precede reenergized capital markets, the desire to cross the line to dance is getting stronger. I've helped startups and investors of every shape, size, and industry cross that line.

Consider the following to overcome the roadblocks:

Profitability is not the same as usefulness. I guess I find it...well, curious, that many investors head for the hills when they look at a company, concluding that online community games, handheld software applications—heck, even clothing—won't yield large returns because "I would never use them."

Then they stop the entrepreneur after the fact and ask for an order form to buy ten items because "their kids would love them." This incongruity is lotus-position-in-a-cave-type stuff.

Investors: Think.

Entrepreneurs: Not everyone is as cool as you or your customers. Create a structured and compelling business proposal that proves your case. I've seen this successfully done by selectively bringing beta customers into the pitch.

The broken feedback loop. It's curious to me that entrepreneurs repeatedly make the same mistakes both in their pitches and their strategies. Equally confusing is the consistency by which feedback is delivered to them in a language of buzzword bingo legends. Unfortunately, what results is a suboptimized funding effort and at times marginal and repetitive deal flow among various investor organizations.

Investors: Consider the startup CEO's ability to understand your feedback. Jargon-laden responses that require us to consult our English-to-English translation book do not help the CEO improve your strategy/pitch.

So the next time you consider stressing "the importance of traction when shifting the product paradigm of the company, to capture the untapped value within the ecosystem," bite your tongue. It's as frustrating for the CEO as it is for the investor to hear the CEO lead a presentation off with (and spend 75 percent of the time talking about) the technical aspects of the company.

Entrepreneurs: Investors are not dunces. Preparing yourself for a pitch by staying up all night rehearsing with your VP of engineering and CTO is often a path to the Blackberry being pulled out by the investor.

Try your pitch on people like my dad, who thinks the Internet is what people hang clothes on to dry. Keep it simple and compelling.

CEOs, you can't do it all. The investor world is ready to shoot right now in my estimation. The investors will become pacifists and holster that gun really quickly if you say that you can do it all.

It may seem like a weakness to say you need help; however, it's a weakness to not admit it. When several renaissance engineers tell me they have the expertise to push product through the CompUSAs of the world because they shop there, clearly it's gone too far.

You bring on expertise and management team members when you need them, not before. It's powerful to come to a pitch with that in mind, because it provides a security blanket of sorts for your ability to watch their money carefully. Therefore, don't feel bad about saying you need to hire a VP of marketing or sales.

Investors: Give them a break: if they make the mistake of saying they can do it all and everything else looks good, don't hold up from due diligence. You might find out quickly that reality is not the ill-advised perception they created.

Entrepreneurs: Talk to any great entrepreneur, and they'll tell you, "I know what I know, and I surround myself with people smarter than I am to do everything else." This approach signals that you understand the difference between a good idea (which there a ton of) and a sustainable organization that can be monetized in the medium term (which there are far too few of).

When we start down the path of evaluating the business, as opposed to evaluating its suitability for us as a customer, we will cross the dance line. And upon considering each other's frame of reference when communicating, it becomes easier to ask for that dance. Finally, when the CEOs realize that not everyone is John Travolta, we'll all be ready to boogie.

I welcome comments, witty remarks, and feedback. Most importantly, however, I encourage you to disagree if you so desire.

Tim Taylor is a partner in Fast Forward Strategy Group, a firm that provides entrepreneurs with pertinent content for investor presentations and startup and early-stage companies with resources like partnerships, alliances, customers, and funding.

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