How is one supposed to resist starting a post about fundraising without quoting Jerry McGuire?
Raising capital is no easy feat. And unlike other parts of building your business, fundraising comes with so many strings attached, it’s hard not to get all tangled up. How do you get the right amount of money to make things happen without going overboard? How do you give yourself space to breath without overlooking results. Should you go big venture capital firms, family and friends, bootstrap?
Even if you’ve figured out what kind of revenue stream you need to get started, that doesn’t really answer the basic and most imporatn question: how do you convince someone to give it to you? Asking for money is an inherently vulnerable thing to do. You’re asking someone to do more than tell you that they think you have a good idea. You’re asking them to put their money where their mouth is.
Daley Ervin, the Managing Director of Engage Ventures, is an expert at fundraising. He’s in charge of a massive portfolio worth billions of dollars, and he knows how to spot a good investment when he sees it. Hundreds of potential partners visit his firm’s office every year asking for money. Some get it. Most don’t.
During Chicago Ideas Week, Ervin gave audiences a glimpse behind the curtain at ENT 101: How to Ask for Money (presented by Capital One), to show them how investors think when people ask them for financing. Here are his most salient trade secrets.
Know Where to Go
First and foremost: a fork in the road. Do you go to your friends and family, or to a venture capital firm?
There are two primary avenues here, and pros and cons to each.
- If you turn to friends and family, you have a better chance of securing the funding, and on terms that are much more preferential to you. This usually means less intense demand for returns, a less diluted influx of investor shares. Of course, the downside can be the emotional intimacy you have with your investors (should things go south), not to mention the smaller sums of capital available.
- With venture capital (VC) firms, you have access to large infusions of money—if they go to you. On the other hand, when venture capital firms get involved, they want to turn your firm into a Goliath enterprise, and they’ll be able to force you to go that route. Each round of investment from a VC will likely result in them assuming a 20 percent ownership of your business.
“Who you raise from is as important on when and how you raise,” Ervin cautioned the audience.
The Tortoise and the Hare
Always be closing (on your next round of fundraising).
The number one mistake most people make as they’re fundraising comes down to a stuttering fundraising effort. A lot of entrepreneurs will raise the amount of money they think they need for their next phase of growth, then stop raising money until they find themselves in need of a capital infusion.
Early on, though, your success is all about momentum. Rather than sprinting to raise enormous amounts of capital in large chunks, like the hare, you need to think more like the tortoise: take short and steady steps consistently, and you’ll end up farther ahead in the end.
Once you get your financing, you’ll have 18 months to hit your targets. While the pressure can somtimes be overwhelming (and your impulse to make as much growth happen as fast as possible as a consequence), the best thing to do is take your time, and be sure that every step you take is a sure, steady, and successful step to the next
Your Team is Everything
When you go into the office of a potential investor, they will be looking as much as you as at your business plan.
Because business almost never goes according to plan. Things change constantly, and it takes a good leader to make sure the organization adapts effectively—and that the organization itself is ready to roll with the punches.
So take time building your team out. This isn’t just about hiring the right peole (i.e. the ones who believe in what you’re trying to accomplish and who aren’t in it for the money), but it’s also about having a good board.
“The best boards are silent,” Ervin reminded the crowd. You want a board that provides advice—not commands. If you get too many cooks in the kitchen, the disorder that ensues can stymie vital growth, not to mention create unpleasant working situations.
Raising capital isn’t a straightforward ask. It relies on a delicate balance of myriad factors that show potenital. Potential that can be cashed in on given the proper infrastructure. As the only saying goes, (and as the turtle and the hare also reminds) “you have to walk before you can run.