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:
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.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.