We need to disrupt startup fund raising - for the benefit of everyone

​I wonder of its time to disrupt the process part of startup fund raising. Should we turn the spotlight of the lean startup and data driven decisions onto VCs and Angels?
 
This thought hit me when I was reading Charlie O’Donnell's post explaining Why Founders are Wrong. This is a pretty good article and it covers some familiar ground. One stat appears in some form every time a VC offers advice to entrepreneurs. In Charlie’s case, he estimates that he invests in around 8 of 2,000 or so deals he sniffs in a typical year.
 
That is a paltry conversion rate of just 0.5%. Imagine the reaction of an investor if you included a metric like that in your pitch!

The wrong way of doing business

​We have come to accept this way of doing business. Founders I meet are a little cowed by the competitive challenge that such a low success rate implies. Investors and their advisors relish endless nights with a cold towel round their head. Buried under information overload. And they feel their finger is on the pulse. No good opportunity will escape the net.
 
The preceding paragraph shows how many cliches this process inspires. Once that point arrives, the whole affair has become routine and burdensome. It has entered the realms of "no-one likes it but that’s just the way things are." 

Life and death for a startup

​Investors may be happy to live with that but I don’t see why startups should. Raising funds is life or death for a startup. Success is essential but the cost in terms of time from the founders is prohibitive.
 
It is no coincidence that the immediate transaction cost of money raised this way is also rather high. Charges and fees for both investment funds and professionals soon add up. The heavy burden reflects the high time costs of doing business this way.

6 suggestions for a better way

​So it would be in everyone’s interest to find a better way. Making this happen needs someone much smarter than me. But in the interests of furthering the idea, here are a few modest suggestions:
 

• Investors of all types should adopt a clearer focus. Be clear up front on what sectors or geographies or other factors make a deal of interest. Better still, publish some minimum financial or track record criteria.
• This will only work if entrepreneurs respect the same principle. Don’t scattergun email your business plan. Or aim to drink a oil tanker full of coffee with anyone who will give you the time of day. Be selective.
• Wouldn’t it be nice if there was a plan for the investment process. You know something that set out the various steps and a rough timetable for when things might happen. No doubt such plans would be broken on a regular basis. But then aren’t all plans like that? No excuse not to have on in the first place.
• Spend more time on due diligence and share the results with the company. Include qualitative due diligence. And make sure that some time is spent in the place(s) where the company founders work. Even if that means having coffee with someone’s Mum.
• Get rid of pitching from the process. The ability to pitch to investors is at best tangential to being a good CEO. And at worst irrelevant. For certain, it is a terrible way to pick between companies. If you must see the team in action, find some potential customers for them and ask them to pitch to that group. At least then the process will add some value.
• Be clear about term sheets and limit the number of variations as far as possible. Most important, if an investor doesn’t believe a business is worth the risk, say No. Inserting usurious or unfair terms to mitigate lack of belief is not good for anyone.

 
Investment in startups plays a vital role in the allocation of economic capital. This money is the lifeblood of innovation and growth. All the more reason that the investment process should be efficient and effective. No-one wins if we get this stuff wrong. 
 
If you have better ideas for improving the way fund raising works, I would love to hear about them.