Raising Capital for Your Startup: It’s About More Than Money

Most of the time for most entrepreneurs, raising money for a startup is not a lot of fun. Absent some combination of a hot deal and a hot market, fundraising is a real chore, too often full of demoralizing turndowns and even more demoralizing walls of silence. Still, as bad as it can be, the process almost always includes some important opportunities that good entrepreneurs will seize and use to their advantage.

The first opportunity the capital chasing process offers is self-reflection. Asking other folks for risk capital forces you (at least if you expect any success) to think about your business objectively, from the perspective of an outsider. And not just any outsider, but a jaded professional investor. Vision and passion are certainly appreciated by most of these folks, but as table stakes, not closing arguments. To seal a deal, you will need to get back to the cold hard realities of your value proposition, your business model, your evolving competition, your financing plan, and your exit strategy. Mission critical stuff that can get lost in the fire drill of day-to-day startup life.

Another opportunity worth grabbing on to in the fundraising process is the learning opportunity. If you have been at all careful about qualifying your investors, you will be talking to folks who very likely know a lot about the environment – technology, competitive, financing, exit, etc. – your startup is living in. If you listen carefully, and ask good questions (you should, in all events, be vetting potential investors as much as they are vetting you), you will almost certainly learn a lot of valuable information from the fundraising process, as much or even more so from investors who turn you down.

Finally, the fundraising process will give you valuable feedback on your teams’ capabilities, collectively and independently, in an area – raising capital – that will only become more important as your capital needs grow on the road to your exit. Raising capital is a skill in its own right – indeed as mission critical a skill as there is. Getting a periodic handle on where your team measures up in that regard may not be worth the trouble in and of itself, but when you need the money you might as well get as much besides money as you can out of the process.

Approaching the fundraising process as a learning opportunity, as well as a way to generate needed capital, may not make the effort any more fun. But it can make it a lot more rewarding.


Building Your Startup Team: Complementarity and Chemistry

Most professional venture investors believe the best predictor of startup success is the quality of the team. Good teams can and do fail, but as team quality drops below “awesome,” the chances for success drop very fast. Thus the cliché that most investors will gravitate to an “A” team with a “B” opportunity over a “B” team with an “A” opportunity.

There are a lot of reasons team quality is so critical to startup success. The incredibly stressful startup environment is the biggest. Startup teams need to accomplish difficult goals with minimal resources in terms of time, capital, and people. Additional stress accrues as outside forces – competitors, markets, technologies, etc. – evolve and force teams to make significant adjustments, often including basic “pivots” (business model, for example) on the fly.

If the extraordinary stresses of the startup environment explain the importance of getting the team right, they also offer a clue to what makes a superior startup team. At the foundational level, what separates the superior startup team from the merely good startup team is complementarity and chemistry.

Complementarity is pretty straightforward in concept, if not always in execution. Within the confines of available resources (financial) and the constraints of team chemistry (more later), you need to make sure the team includes top-tier players at the mission critical startup tasks (i.e. the tasks that need accomplishing in the current round of funding), as well as the flexibility to successfully “wing it” with respect to important ancillary functions.

The trick to building a complimentary team lies in recognition of, and dealing with, the well-established HR principle that when people get to choose who they work with – or who works for them – they tend to choose people like themselves. Now, if you are a founder, and thus most likely very confident of your own near-perfection, that might not seem like a problem. If you’ve got perfection, why not clone it if you can?

Consider if Apple had been founded not by Jobs and Woz, but by Jobs and … Jobs. If you know the Apple story, you know what a catastrophe a Jobs/Jobs founding Apple team would likely have been.

The bottom line is that however perfectly suited you may be for leading your startup to fame and fortune, building a team of clones is seldom the best way to go about it. Instead, look for people with different skill sets. And as much or even more so, different personalities and perspectives on business, technology, and life. The most successful startups – even those like Apple in the years after Jobs returned from exile that were dominated by a leading personality – build leadership teams with diverse skills, experiences, perspectives, and personalities. Just ask Tim Cook.

And that leads to the second, and harder to execute, aspect of assembling a superior startup team: chemistry.

It’s not enough to assemble a team that “covers the waterfront” in terms of skills, experience and personality. You need to make sure those folks can also form very strong bonds with each other (thus the “chemistry” analogy). Because in the constantly changing world of the startup, relationships between key players on the team are going to be under almost constant stress as company circumstances evolve and people have to adjust to changing opportunities and challenges. As anyone who studies morale in the military will tell you, folks in foxholes are motivated more by their loyalty to the folks around them than to “the cause” as such.

On that last point, one of my favorite quotes from an entrepreneur came when he was asked what he would tell his team at the beginning of his next startup journey. He replied: “Folks, we are going on a very long and difficult journey. On this journey, we will carry our wounded – and shoot the deserters.”

The quality of the team has long been the most important factor for most venture capital investors, for good reasons. As you think about assembling your team, particularly in the early days, don’t make the mistake of hiring folks because they look like you, or because they are a perfect skills fit. Look more for folks who compliment your skills and personality – and that look like the kind of people you want on your side when the going gets very tough. Because it almost certainly will, likely many times.

To Be or Not to Be: The Entrepreneur as Hamlet

Watching promising new companies fail – and a good chunk of even the most promising startups ultimately do – is not a lot of fun. It can be instructive, though. While many startup deaths are beyond the control of the startup itself – e.g. the technology doesn’t pan out, or someone else gets there first – others are variously the result of entrepreneurial mistakes. And like the rest of us, good entrepreneurs can and often do learn and ultimately profit from their mistakes.

Today, my subject is one of the most painful of entrepreneurial mistakes to watch, a mistake that is too common and (to make matters worse) by its nature tends to play out like a train wreck in slow motion. It’s what I call Hamlet syndrome. The startup that fails not on account of poor execution, but rather on account of not executing at all.

What makes Hamlet syndrome so frustrating is that after it happens you are left with the sense that the afflicted entrepreneur never even gave himself a chance to succeed. In most startup failures, even those that can be laid squarely at the feet of the entrepreneurial team, a dispassionate observer can at least come away thinking that the entrepreneur went down swinging.

Observing Hamlet syndrome, on the other hand, is like watching a batter, in the big moment of the big game, spend a lot of time fiddling with his glove, looking for signs, stretching, and stepping in and out of the box – interspersed with staring blankly at three called strikes before walking back to the dugout.

Ok, a couple of real (but disguised) examples.

Our first victim is a brilliant scientist with a long track record of good ideas, many of which have been turned into successful products. More recently, she developed some really interesting imaging technology with a broad range of potential applications, across a variety of industries from metallurgy to medical imaging to 3D printing. (Entrepreneurs with target rich ideas are particularly susceptible to Hamlet syndrome.)

A threshold question for this entrepreneur, was obvious: what application in what industry should I go after first? Obvious though the question may have been, the answer was much less so. And so … the entrepreneur did a little research. And then did a little more research. And then did a lot of research. And then … well, let’s just say after several years of waiting on a decision, I just walked away. That was two plus years ago, and I haven’t seen anything in the news to suggest that the entrepreneur ever did pick an application or a market.

Startup two had developed a really fascinating set of algorithms for manipulating data that dramatically improved the accuracy of all kinds of forecasting models. Startup two’s entrepreneur had some of the target rich marketing challenges of startup one, but even more than that could not settle on a business model. Was the business about enabling customers to make better predictions, or about making better predictions? After two plus years of debating the point, and increasingly complex analysis of the pros and cons of each approach, I am beginning to doubt there will be an answer before the window for this entrepreneurial idea closes.

I am not unsympathetic to either of the entrepreneurs in these two examples. Given all of the known, and unknown, unknowns inherent in any worthwhile startup opportunity, the possibility of making a critical mistake is a near constant source of stress. And surely picking the wrong application or market or business model is as fraught with risk and implications as any.

But as big as decisions about applications and markets and business models are, in almost every case the only decision that is certain to be wrong about any of these things is not to make any decision at all about these things. It is axiomatic that you can’t miss a target you never shoot at – but perhaps more to the point, neither can you hit a target you never shoot at either. In the startup competition, if you wait until your aim is certain, someone is almost certainly going to claim the kill before you pull the trigger.

Don’t be another victim of Hamlet syndrome. Pick a target market; spec an MVB with a compelling value proposition; decide on a business model; and pull the trigger. You may be wrong, but if you haven’t taken too much time and money to figure that out, chances are you’ll likely get at least one more shot.

gener8tor: The Gift That Keeps on Giving

It’s been a few years now since I wrote my first appreciation for the folks at gener8tor.  Back then, they had just launched, and yours truly was surprised (albeit very pleasantly) that they had gotten not just off the ground but had achieved some sort of seemingly stable orbit.  Which surprised a bunch of people, I think.  I know it surprised me.

Well, here we are in November 2017 and they have flown well beyond Madison and Milwaukee to places as far afield as Minnesota, Illinois and even my own neck of the woods up here in Packerland.  Recently, it was my good fortune that a scheduled speaker for a OpenBETA Lunch program in Oshkosh had a last minute scheduling conflict.  My good fortune in that I was offered an opportunity to substitute as the headliner for the event.

The Oshkosh event was a lot like my first time at gener8tor way back when in Milwaukee.  Quirky space, a roomful (well, ok, maybe a half-dozen plus) of raw but passionate and very early-in-the-process entrepreneurs.  Who asked good questions, and shared some good ideas.

What was most interesting about the event, for me, was in fact how it took me back to those early gener8tor classes, where the entrepreneurs were rawer than raw, and the ideas sketchier than sketchy.  And, in fact, what amazed me about gener8tor then – and caused me to write my initial blog about the program and team – was how over the couple of months after I saw that cohort of newbies the gener8tor folks had somehow worked some magic to turn them into that rarest of commodities hereabouts, fundable high impact entrepreneurs.  (And, yes, they all got funded.)

Since those times, gener8tor’s flagship program has expanded to new places and moved a bit downstream in terms of appealing to less raw, even semi-polished entrepreneurs (often hailing from well beyond Wisconsin).  And I’ll admit, I had (and to a limited extent still have) some doubts about whether they can sustain their success across multiple markets and with later stage entrepreneurs.  But the results continue to speak for themselves, and if we – that is those of us who are serious about growing the high impact entrepreneurship and investing community in our little corner of flyover country – are lucky gener8tor has a lot of fuel left in the tank.

All of that said, what really made my day at the OpenBETA event was seeing gener8tor staying true to its “rawest of the raw” roots, and doing it in the New North.  In Oshkosh even.  (They also have a new gBeta program in Green Bay.)   That means, I think, that it won’t be long until entrepreneurs and investors in Madison and Milwaukee start  realizing there are deals to be done in Wisconsin in places other than Madison (mostly) and Milwaukee.

And so congratulations to all of us in the high impact entrepreneurship and investing community across Wisconsin.  We are the lucky benefactors of the gener8tor program – the gift that keeps on giving.

Jones: Hard truth about angel investing

Paul Jones, co-chair of Venture Best, the venture capital practice group at Michael Best, has been selected as a regular contributor of OnRamp Labs, a Milwaukee Journal Sentinel blog covering start-ups and other Wisconsin technology news. Paul’s most recently contributed piece, “Jones: Hard truths about angel investing” can be found under their Business Tab in the Business Blog section: Click here to view his latest blog.

A short excerpt can be found below:

“Angel investing is a critical part of the high impact startup world, particularly outside of the big venture capital centers. A good portion of Wisconsin startup success stories achieved liftoff with critical assistance from angel investors and their capital.

But what about the angel investors themselves? How does angel investing work for them?

Well, you don’t have to look very hard to find blogs, books and speakers extolling the virtues of angel investing for the angels. And a lot of them make a pretty good case that the angel investing community makes a nice profit for its efforts. A good case, but also a misleading case.”

Click here to read more.

High Impact Entrepreneurship in Wisconsin: The Smoke and the Fire

By Paul A. Jones

When it comes to life sciences research, Wisconsin is one of the leading players in the nation, with UW-Madison a top 5 recipient of NIH funding, the Marshfield Clinic an important national player, and UW-Milwaukee an up-and-comer. With companies like Promega and Cellular Dynamics, the state has had a few noteworthy biotech entrepreneurship stories (ok, not on the Amgen or Genentech scale, but still…).  So it is perhaps not surprising that a lot of folks look at life sciences as the big story in terms of growing the high impact and venture capital sector in Wisconsin. Not surprising, but wrong. The real entrepreneurial fire in Wisconsin, at least in terms of the fire that is most likely to make Wisconsin a regular stop on the national venture capital map sooner rather than later, is in the IT sector, and particularly what, for lack of a better term, I will refer to as the “web-centric” IT sector, encompassing software startups in web-based businesses, mobile applications, etc. whether in B-to-B or B-to-C environments.

Now, let me say up front that I like the biotech sector. My first venture backed deal, way back when, was a biopharmaceutical spin-out from Duke University Medical Center. My venture fund, over ten years ago, was dedicated to early stage life sciences investing (though a cynic might suggest that the experience acted as a cure). Both of those deals were in North Carolina. The first, in 1990, when North Carolina’s venture capital bona fides rested mostly on a local fund with $6 million in capital, and the second when you could count the number of funds in the state with $50 million under management on the fingers of one hand. (Something you can do in Wisconsin today, with a couple of digits to spare.)

Having fallen for the biotech venture capital story in a venture capital-poor location before, I think folks looking for life sciences to drive the Wisconsin venture capital story over the next few years should proceed cautiously – and consider a much more attractive near term story: the web-centric sector.

First, the shadows hanging over the life sciences story as it relates to Wisconsin and venture capital. In general, building life sciences companies takes more time, more money, and more grey hair than building web-centric companies. Even a straightforward medical device play is almost certainly going to take a couple of years and a couple of million or more (usually a lot more) dollars to get to the point where it can be introduced to the market. A team that includes folks who know their way around a very complicated regulatory process, expensive distribution channels and exceptionally risk-averse customers. Take each of those variables up an order of magnitude if you are talking about a therapeutics company.

Now ask yourself, how many venture capital investors in Wisconsin have $100 million of capital (not much money, really, when you look at the funds that do a lot of biotech deals) devoted to early stage biotech deals? None. How many folks in Wisconsin have C-level experience managing big companies in the life sciences space and experience growing them from the research stage through FDA approval (and how many UW-Madison life sciences professors are going to hand over the reins of their spin-outs to those folks)? Well, let’s just say not many.

The bottom line is that while a great research base, which we have in Wisconsin, is necessary for growing a significant and self-sustaining high impact life sciences sector, it is far from sufficient. You also need a lot of very patient money with a lot of industry experience and a lot of folks with more than their fair share of grey hair. And those are things in short supply here.

Now consider what resources you need to build a web-centric business. Well, as often as not, you can build and actually sell the proverbial “minimal viable product” with somewhere between $0 and $500k, in somewhere between 3 and 12 months. And you don’t need anyone with grey hair to do that, or most likely, to take the company all the way home to the exit. And if perchance you need more capital, your needs are likely to fall in the less than $5 million sweet spot for Wisconsin’s modest collection of angel and venture capital investors. The fact is, you can probably take ten web-centric startups from conception to exit on less capital and in a small fraction of the time it takes to nurture one biopharmaceutical startup from conception to exit. Given how many startups ultimately succeed, any smart risk capital investor is going to take the portfolio of ten deals over the “all or nothing” bet on the biopharma deal.

Don’t get me wrong. I believe venture-backed biotech will be a major part of a vibrant, self-sustaining high impact entrepreneurship economy in Wisconsin. But web-centric entrepreneurs and investors will get there first.