Early Stage Companies Seeking Funding Need to Raise the Bar
By Brock Blake
November 1, 2009
Charles Dickens once wrote, “It was the best of times. It was the worst of times.”
While many high-center on the latter part of that statement calling today’s environment the worst economic times of a generation, we should not forget that tremendous business opportunities are out there. Frankly, it is often during difficult times that the innovative ideas of bright, capable entrepreneurs emerge to drive the next generation of economic growth.
Because FundingUniverse works with hundreds of banks and nearly 1,000 angel investors across the country, we have a fairly strong pulse of the current economy. In fact, there isn’t a day that goes by where I am not asked about the current state of angel funding and bank financing. Most people assume (because of all the bad news that we see on the news) that all early-stage funding has dried up. While the amount of deals funded has clearly dropped from last year, resources are still finding their way to good strong companies.
With a reduction in the amount of available capital and a steady flow of entrepreneurial ideas, the current landscape means that there is a significant increase of new companies and ideas competing against each other for venture-type funding.
Given these economic shifts, how does an early-stage company stand out or increase its chances to secure funding? Our experience at FundingUniverse has shown that there are a few fundamental steps that an early-stage company can take to become investor-worthy:
Today’s investors want to see earning potential and tangible components of a business concept. Investors look at a company’s past results as a good indicator of future expectations. Traction as shown by solid revenue, customer contracts, completed technology development, competent personnel, intellectual property and established contracts help establish viability to both a team and potential investors.
If a potential investor does not see a clear path to get his or her money out of the company within a reasonable amount of time, the investor won’t be interested. Investors typically look for returns around 10 times their initial investment (i.e., put in $100,000 today; get $1 million back in five to seven years).
Investors invest in people. A company’s ability to attract great talent that inspires trust can greatly enhance an early-stage company’s ability to raise money. At the end of the day the investor has to answer to the affirmative the question, “Can this team execute on the business plan?” Being able to bring a diverse group of domain experts and industry executives to the table along with credible partners shows a lot about the effectiveness and credibility of the entrepreneur.
There are two very important aspects that an investor will want to see regarding your market: 1) a strong market need and, 2) a large and growing market. When thinking about the market need, you’ll want to make sure that you are solving a significant problem for potential customers (and that they’ll pay you for solving the problem). In addition, the large and growing market shows the investor that the business idea can easily grow to be a $20 million to $100 million business.
One of the mistakes that entrepreneurs most often make is that they price themselves out of the investor market (with an unrealistically high valuation). Here in Utah, 95 percent of the successful angel investments have a valuation between $500,000 and $3 million. If you feel your company valuation is higher than that range, you better have significant revenue and/or traction, or it will be a deal breaker. Remember, down markets give investors stronger leverage because cash is king and credit is harder to come by.
The Bottom Line
Great ideas are still going to get funding, regardless of the economy. By understanding what investors look for, entrepreneurs can reduce barriers to funding, navigate the process more easily and increase the chances of obtaining funding for their business.
Brock Blake is the CEO of FundingUniverse, Inc, a company that creates a platform to help a network of more than 1,000 active angel investors, venture capitalists and banks connect with qualified investment opportunities. Brock can be reached at firstname.lastname@example.org