What to do next?

Interestingly enough, research done on how start-up firms get their first outside financing reveals that the conventional wisdom about pursuing financing is incomplete. Conventional Wisdom (and many books on entrepreneurism) says to find a few investors who are most likely to be interested in your company. Then you should research them extensively and approach them when you are ready to unveil your plan.

But the reality of the situation is that the more investors you present your company to, the more likely you are to get financing. This doesn't mean that you should randomly send out your plan to every financier you can find. Some level of targeting is necessary (size of investment, industries, etc.), but you have to be sure to hit enough investors with your plan.

In this myth, we will examine how most entrepreneurs go about the process of raising their financing, and why it takes them a long time (6-12 months is not unusual to get financing!). But there's no need to spend 12 months trying to find someone to fund your company ... if you understand how to effectively plan and execute a multi-stage "financing campaign".

When I first went out for venture financing, I was a novice who chanced upon many of the elements of a successful financing campaign without a conscious understanding of what I was doing. The early success that I had led me to believe that raising financing was an easy thing to do! Not so... It wasn't until much later, when I became familiar with how not to raise money that I was able to fit the pieces together.

During Christmas of 1994, I wrote our business plan and prepared to send it out to Venture Firms in January of 1995. Several VC's had approached us near the end of 1994, and I met with them under the guise that "we really didn't need financing, but wanted to meet with them to understand the process." These meetings later proved to be a critical component in speeding up the process.

One of my advisors, Dean Redfern, had been on both sides of the VC financing table (working for companies raising money and working for the VC's), and so we hired him to help us through our first attempt.

He read the plan and quickly suggested some changes that would make it more financible, particularly around articulating a successful business model that we wanted to emulate. After the plan was in good shape, I prepared a standard VC presentation (10-15 slides on each major point of the plan, including the market, the products, the company, the management, the competition, etc) and we did a "test run" with Dean's friend, Bob Galius. Bob was a former professional basketball player --now turned Venture Capitalist.

One cold January afternoon, I ran through my presentation with the two of them. As I ran through the presentation, I had the distinct impression that Bob was really bored because he just sat there stone-faced through the whole thing!

At the end of the presentation, though, it became clear that he had been paying close attention. He pointed out two or three areas where he thought the "story" was weak. He also fired off a series of questions that were bound to come up from any investor listening to the presentation. Based upon this feedback , I then went back and honed the story, changing slides and messages slightly.

Within a short time, we were ready to send out the business plan. We sent it out to 10 firms, making preparatory and follow-up phone calls. Some of these firms had contacted us in the past, and some were firms were familiar to Dean. We never made a single cold call - there had always been some previous association.

Of these 10, approximately five wanted to meet with us to see the presentation.

Sure enough, during the presentation, the same questions that Bob asked came up. A big issue, as expected, was the management issue. I was only 24 years old at the time and in their eyes, I didn't seem like the best choice to be running the multi-million dollar company we wanted to build.

Of course, I had a well-rehearsed answer to this question: I would do whatever was in the best interest of the company (i.e. if they felt we needed a new CEO, I would listen). This answer, combined with the demonstration that I was taking advice from an industry veteran like Dean, helped defray the issue somewhat.

Within weeks of our presentations, one of the firms (turned out to be one that I had actually taken the time to get to know before this process started), sent us a term sheet indicating that they were ready to invest. This firm knew that we were talking to other Venture Capitalists, and so they wanted to be the first one to get in on the deal!

Within days of receiving the first term sheet, I placed calls to several of the other firms we had met with and told them about the first term sheet. Miraculously, several other term sheets appeared at our door within days!

In short, we had three term sheets and our pick of the VCs we wanted to go with...all this within about 45 days of sending out our business plan ... Needless to say, we were quite pleased with our results!

What did we do right?

In addition to defining a business model that was proven in the marketplace, and following the guidelines in myth #2, we ran the financing process like a well-oiled machine. Unknown to me at the time, we had defined all of the elements of a successful financing campaign, and the venture guys knew they only had a small amount of time to "jump on the bandwagon," or we'd move on without them!

Let's now contrast this with how most entrepreneurs approach this issue...

John Q. Entrepreneur, who is extremely busy trying to run his company and has a million to-do's pile up on his desk, hastily finishes the business plan in his spare time. He is now ready to try to squeeze "raise financing" into his already hectic schedule.

This brings up a very important point about financing - time. Interview any entrepreneur who has been through Venture Capital financing, and they will all tell you the same thing: "Raising financing is so time-consuming that it could easily be a full time job!"

Naturally, John Q. Entrepreneur sends out the plan to a few Venture Capital firms, and he waits for feedback. He also places a call to be sure that the plan was received and that it will be read. Who does he send it to? He sends it to the places he's most likely to get financed his best leads, right away.

At some point in the indefinite future, other potential financing leads crop up for John Q. Entrepreneur. As soon as the lead appears, John Q. sends out the plan to them and, as before, waits for some feedback. This happens again and again, and at some point he is able to set up a meeting with a Venture Capital firm or private investor. The VC goes back to "think about it". John Q. then sets up another meeting with another VC, makes a similar presentation, and on and on until (hopefully) somebody is interested enough to put money into the company! Call this the waiting game or the wishing well. John Q. seems to have time on his hands.

Some of the problems with this type of financing odyssey are:

• Financing leads crop up randomly during the process and are usually pursued serially
• The total length of time that it takes to get the financing done is too long
• The entrepreneur is very busy running the company and has a hard time juggling the financing with all his/her other tasks
• The entrepreneur is at the mercy of each investor and is constantly in "wait mode"
• The best leads get used up quickly, before the story has been "tested"

Ideally, the entrepreneur would be able to turn the tables on the venture guys and make them hurry up...

Pretend, for an instant, that you are a candidate for political offices. And let's say that you're running for the United States Senate, or for Governor, or even for President of the United States of America.

Your expertise would probably (if you're a good candidate) be in communicating with the public and getting them to vote for you on the basis of your persona, your experience, and your platform -- not in handling the logistics of booking speaking engagements, etc.

What's the first thing you would do? You would hire a Campaign Manager (C.M.) who would act as your "handler". This way, the C.M. could handle all of the logistical work, and your job would then be to show up, communicate your platform effectively, and on the strength of your presentation, convince voters that you should get the job.

You would work with the C.M. to "tailor" your messages by "test marketing" them on focus groups.

When Ronald Reagan ran for re-election in 1984, a modern political campaign was born because of the extensive use of focus groups to "tailor" messages. The campaign pollsters would show videos of Reagan and his opponent, Walter Mondale, giving speeches on important political issues to groups of varying demographics. Each participant in the group had a hand-held device that allowed them to "rate" every sentence that was being said. Through a very fascinating collection process, there were clear peaks and valleys for each candidate throughout their speeches. Reagan was then advised to "tailor" his speeches to dwell on those items where he was viewed favorably in light of what Mondale had to say.

So once the key messages have been selected, you're ready to hit the road! And it's important to keep in mind that your campaign should have a definite timeframe - the "Election Day" of your ideas.

Sure, most entrepreneurs despise the thought of running for "political office". But, if you treat your "financing campaign" somewhat like a "political campaign," then you will greatly enhance your chances of being effective in raising financing!

The first (and perhaps most important) principle in this myth is that it's tough to raise financing all by yourself, especially if you are first-time entrepreneur without a lot of contacts. Your goal should be to find someone who is 1) well connected, 2) has been through the financing process before, and 3) is willing to make introductions to financiers for you.

Ideally, this person should have some portion of their compensation in equity in your company. This way, they are also incentivized to help you succeed over the long term of your company.

This will also save you a considerable amount of time and frustration, because this person can act as your "handler," helping you to organize the process while making initial contacts. Remember that the financing process can get bogged down for a number of reasons, including the fact that you have a company to run! A campaign manager can keep the process moving along.

But getting a "campaign manager" will do more than just save you time. It will greatly increase your chances of getting Venture Capital financing. Time and again when I speak with first-time entrepreneurs

who were successful in raising a large amount o financing, there was someone on their board of advisors, or board of directors, who helped significantly in getting that first round of financing.

Where do you find this person? There is no one answer. Some entrepreneurs have connections from the companies they have worked at. Some meet advisors at entrepreneurial groups and/or presentations. Some meet them simply by cold-calling successful entrepreneurs and asking them if they would be interested in working with an inexperienced entrepreneur. A good place to start is through your lawyer, who should have contacts with other entrepreneurs and/or financiers.

There is also a whole class of people, referred to as private placement agents, who help small companies raise financing for a living. Many banks or investment banks have private placement practices.

The campaign manager should be intimately involved in "test marketing" your messages. This person should have some "trusted" investors he/she can call to test out the plan and the presentation before going out to actual Venture Capitalists.

Many times you will want to meet with potential investors before you are formally out looking for financing. Again, a good manager will help you introduce yourself to these investors and informally test out your messages. "Priming the pump" in this way can lead to an extremely effective campaign. This is the second principle of the campaign:

Next, and this hits at the heart of this myth, you need to target a few investors. And be prepared to meet with at least 20 investors as part of your campaign.

Research done at MIT by Ed Roberts shows that the average firm that gets Venture Capital financing has spoken to approximately 20 Venture Capital firms before they finally get financing. That's the average; this means that some firms might talk to as many as 30 or 40 different potential investors before finally getting to yes!

You don't want to have your manager make 20 introductions on day one. Instead, you want to do it in waves. This will help you "hone your message" for the next set of potential investors. And you don't want the waves to be too far apart; you just want to be able to gauge the reaction of the first set before you meet with the second set. After each investor meeting, your story should get better by analyzing what went well and what didn't during the meeting.

Finally, you want to plan the campaign like a project with an estimated time to completion. Part of your goal in running a financing campaign is to get multiple investors interested at the same time. Why? This is because Venture Capitalists often have a tough time doing things alone; they like to act in herds, and if every one of their decisions is potentially a multi-million dollar one, they want validation.

How do you do this? You do it by carefully timing when you send out plans and schedule meetings. A Venture Capitalist will assume that if another firm is interested, then it must be a good deal to get into. This will accelerate their decision making process considerably.

Another reason to attempt to plan the timing of your campaign in this way is to get multiple 'yes' answers around the same time. This will give you some leverage to negotiate with the Venture Capitalists on the actual deal that they're willing to give you. If they think that other firms are also about to put term sheets on the table, they'll be willing to be much more flexible so that they aren't "left out of the deal".

One way to reduce the burden of running a financing process, and to greatly increase your chances of success, is to treat it like a "campaign". The principles to keep in mind when designing your campaign are: