The Question Every Entrepreneur's Asking
It's not uncommon to see them peering through the large windows that face Markham Street here at the Venture Center. They lift their hand to their brow, blocking the light, trying to get a better view inside.
Without exception, they ask, "What is this?" or "What do you do here?"
Just the other day, someone stopped off the street into our offices to learn more about the Venture Center.
"So..." he said expectantly, "Do you help entrepreneurs get investment?"
His question is not unique. In fact, nearly every startup founder begins with that question marching around in his or her head somewhere. How do I raise capital?
Everyone wants to find capital, but the successful entrepreneur recognizes both the risk and reward of raising money. He or she understands how (and more importantly, when) to leverage a capital raise to fund a startup endeavor.
The Most Expensive Dollar
The most expensive dollar a startup founder will ever leverage is the capital-raise dollar. With it come ironclad obligations and responsibilities, not unlike those codified in a marriage agreement.
A capital raise dilutes the founder's ownership stake in the company, and it is a high price to pay if all that is exchanged is capital. The smart entrepreneur recognizes this fact and mines the ore to uncover the gold of additional assets or benefits that accompany the cash investment.
These assets need not be hard assets (and in truth, they often are not). Usually, an investor brings expertise, insights and connections that the founder would be hard placed to obtain on his or her own.
As an entrepreneur, you can reduce the "cost" of the capital investment by recognizing and leveraging the additional value that the investor brings to the table.
How to Avoid the Capital Raise
Some entrepreneurs have learned the above lesson and recognize the importance of retaining as much control of their companies as possible. How do they do this?
There are a plethora of ways to get it done. The most immediate method is to bootstrap the endeavor. This method is probably not a bad idea to implement even if you have raised capital. Another method that is sometimes under-used is that of raising revenue.
This is also known as "Sell It Before You Build It." What is the advantage of the "SIBYBI" methodology? Actually there are several advantages.
To the entrepreneur, the advantage is clear: he or she retains control and ownership of the company. In addition, the position of the company is stronger when the time does come for raising outside capital because the new startup is not as dependent on or desperate for the capital. The company has also begun to prove its viability in the marketplace by generating revenue.
How to Get the Money
"Show me the money!" Jerry Maguire's motto from the hit 90s movie could be the rally cry of entrepreneurs everywhere. But what does it take to get the money?
Beyond the standard lean canvas, business plan, forecasts and projections, the smart entrepreneur has a secret weapon when it comes to obtaining capital.
How does a startup shift the negotiating advantage back in its favor? How does it create an environment in which it is oversubscribed? There are a couple of primary factors that can lead to this advantageous outcome. Increase revenue (sales) and reduce risk.
How to De-Risk the Investment
Entrepreneurs are crying, "Show me the money." While investors reply with, "Reduce my risk!"
There are four primary areas that entrepreneurs can de-risk before seeking investment. These are product, market, team and operation.
Entire books have been written on each of these categories, so for the sake of this article, we'll just look at one. The market.
3 Steps to Help De-Risk the Market
There are a lot of ways to de-risk the market. The basic truth isn't complicated and isn't even necessarily anything new.
The rule of thumb is this: the more information you have and the more unknowns you eliminate, the greater the risk reduction.
So let's take a look at ways in which the smart entrepreneur de-risks the market.
1. Know Your Problem
The smart entrepreneur knows the problem that he or she is trying to solve. By 'problem,' I don't mean the solution the product or service provides. The successful startup founder moves beyond the superficial and uncovers the visceral, emotional and psychological obstacles that will be soothed or solved by the introduction of the proposed product or service.
The successful founder is also able to pivot and adjust with precision when new information or insight is discovered. This helps ensure the most effective and profitable position of the product or service in the marketplace.
2. Know Your Customer
Who has the problem? This is the paramount question that the smart entrepreneur asks when it comes to identifying the right customer.
Who is the early adopter? What motivates the early adopter? What is the early adopter's points of pain or frustration?
Secondarily, where does the early adopter hang out? What does the early adopter spend time on? What is important to the early adopter?
The startup founder has answers to all these questions, or uncovers them. The successful entrepreneur begins to discover the psycho-demographic makeup of his or her ideal customer; and by doing so, begins to get to really know the customer.
3. Know Your Solution
Is this the right solution? Does the solution solve the real problem? Does the solution solve the right problem? The smart entrepreneur can answer these questions and can back them up with data.
The Most Important Question
Technology allows us to do almost anything. Access to resources has never been greater. The most important question that the smart entrepreneur asks is not "where and how do I get capital?"
The most important question that the smart entrepreneur answers is "why should 'it' be built?" Once he or she confirms that the thing should be built and why it should be built, the rest falls into place.
A new clarity takes hold of the startup founder. He or she no longer struggles to find capital, but instead knows when and how it should be leveraged in service of the dream.
With hard work and a little luck, what was once a dream becomes a new reality. That is the magic of this thing we call entrepreneurism.