Private equity managers can’t find good startups. Startups are either too good or too risky.
Me: “Morning! How can I help?”
Client: “Hey Al, we can’t find investors! We need a better deck, financial model, and business plan.”
*The next morning*
Me: “Morning! I heard your company is launching a new private equity to invest in startups?”
PE-Manager: “Hey Al, yup, we are. The problem is we can’t find startups. The very good ones don’t need to raise funds or would go for sequoia-like firms. The ones who approach us are too risky to invest in.”
Let me connect the dots here. These two conversations actually happened between my clients and someone who I just met in a newly founded private equity department of a backed-up FinTech startup.
It’s as if both of them want to reach each other but can’t.
If one thing is the reason for them not intersecting, that would be time.
Odds are, you’re not a private equity, so I’ll be addressing you, the startup enthusiast or founder. You’re not raising investments because of your bad timing.
I initially thought that the private equity manager was referring to problems in the market because of the recession. However, he indicated that this recessive economy has nothing to do with why they’re not investing. On the contrary, they’re recommended to invest more by their upper management.
After all, great companies were formed during a recession.
So then I reflected and analyzed my work with my old clients to understand who was raising and who was not. So, out of this minor research, let me try to convince you of the perfect time to start looking for an investment.
Let’s call this startup ClosedAI (I’m not in a very creative mood. It’s my second article of the day…. Fine, if you insist.)
Let’s call the startup AppTesZongle (Derived from companies that invest in their stock like Apple, Tesla, Amazon, and Google… I actually did not know that I could do worse than ClosedAI, but you asked for it.)
You are the founder, by the way. Let’s start.
You: “Hey Al, Good day?”
Al: “Seriously? Discussing my welfare? Cut to the chase.”
You: “We have $100k of capital, and we need a pitch deck for our company to raise investments.”
Al: “Alright, it’ll be $20k.”
You: “Perfect. Can you also improve our business plan and create a fundraising strategy?”
Al: “Yup, that’ll add another $50k.”
You: “Sounds reasonable. Can you add in a financial model?”
Al: “That’s actually the easiest. You had $100k of capital. You paid me $70k, and the financial model is $30k, by the way. So you’re broke. You don’t really need a financial model. Just take a small sticky note that has the number zero written on it and give it to the investor.”
You: “Wow, brilliant! Will that lead to an investment?”
I said I’m not in a creative mood, but I’m always in a humorous one. Expect more of that these days, given that Chatbots are taking over blogging.
Alright, now back to being boring and serious.
You: “Hey Al, our startup, ClosedAI, needs a deck for fundraising.”
Me: “Okay, what’s your progress?”
If that’s your answer, let the idea of investment go. Initially, if there are 1000 investors in this world, less than one would invest in an ideation-level startup.
Unless you’re quite a proven entrepreneur with a track record, you won’t be able to raise funds. If Elon Musk decides to create a new startup tomorrow called Zebra that works to improve the lives of animals, a few things will happen.
- The stock of Tesla would decline.
- Twitter’s HQ will freak out.
- He will Tweet about it.
- But most importantly, he will easily get investors to fund it.
You’re not Elon Musk (I think…)
For that reason, I’d play the odds and just work on creating a product. It does not have to be flashy, but it has to be working.
“But I don’t have the funds for it.”
Save, and invest in your idea if you strongly believe in it.
“But I’ll need to save $1 million for an MVP. I’m building a spaceship.”
I actually do not have an answer to that… Don’t?
Wait, I can do better. Build a mock-up of it, get clients to agree to partner with you in the future, then attempt to get an investment. I’m just trying to improve your odds (Plus, the space race is an expensive gig.)
This is already sounding better. But, based on my professional experience, I don’t recommend that you raise funds at this stage. You might have a killer MVP and a fantastic market opportunity.
But here’s the thing. If an investor decides to invest in your MVP-level startup, odds are they’re going to get quite a good deal out of your pocket.
The thing about valuation is that it works better when there are numbers.
Let’s say you raise $250k with an MVP for a 5% equity. You’re happy, and you start to implement. You use the first $20k for marketing and figure out there is a huge demand for your product. So huge that a financial analyst told you your startup is valued at the moment at $20 million.
The investor has 5% of that (more or less), which is valued at $1 million. All that investor did was strike a deal with you. The annoying part is that you know you could’ve invested $20k off your savings, but you were scared to do it.
Now the investor just made an easy $750k out of your fear.
That’s what I consider the sweet spot. You know how much you actually need to reach the next level. You understand the market and know your worth. This is where I advise you to start raising funds if you need to so that you’d grow faster.
You could choose not to as well. This is what that private equity manager was talking about. He told me there are many startups out there that are post-traction and know their worth to the degree that they do not require investment at this stage.
They do not want a bad deal. They want to wait till they absolutely need this investment as well as when they showed how big it could become to get the best out of the situation.
This moment is the moment of reversal. They won’t need investors. Investors will want them. This is the timing that you need to go for if you’re looking to fundraise to become a “backed” startup.
Some would disagree, but that’s okay. Some would believe that raising funds at an MVP stage would put you on the radar so that when you raise later on, you’d reach a wider network.
That’s one way of looking at it. However, getting on the radar is much stronger using the power of the market rather than PR.
- If someone told me that a famous VC invested in a company that sells shirts, I would be intrigued.
- However, If I buy a shirt and feel the product is amazing, I’m a customer for life who’ll promote this to at least a dozen people.
Would you rather get known on a news article that will be seen by a hundred thousand people? Or be recommended through word-of-mouth to the same number of people? One of those will lead to actual product growth; the other will only be supportive of it.
I’m Al, a business consultant in Zurich, Switzerland. I believe in the power of delivering value to you, the reader. Follow me on various social media platforms if you’re interested in the value of my content.