Posted on February 5, 2014 @ 10:45:00 AM by Paul Meagher
I just had an interesting conversation with a client of mine who started up a company 6 years ago and is starting to gain serious traction. He just finished raising a million dollars in the New Year to buy the ownership and rights to a medical device and is $200,000 short of a second million dollar fund raise for operational capital.
He pitched his project to numerous investors during the 6 months before his first million dollar fund raise. He put in many 20 hour days. He had the full amount raised just before xmas but a half-million fell through during the xmas/new year period when an investor had his check book out ready to sign over the money but dropped the bomb that he wanted control of the company (chairman of the board and powers to appoint other board members). He walked away from the deal because he did not go through all the effort to raise money to have the company taken away from him. He was able to find other investors shortly after he nervously walked away from that investor.
One of his take away lessons was that the first million was the hardest to raise. This was in part because it was a learning process to raise the money and he has become more effective at closing deals, sourcing the right investors, and filtering out investors who claimed they were interested but were dragging out the due diligence process too long.
After raising his first million it became easier to raise the second million in part because he established credibility and expertise from the first fund raise and in part because of the traction that the first fund raise created. What he learned from his first fund raise was to spend less time trying to get investors on board by not participating in a protracted due diligence process. If the process takes longer than a month then he politely tells them he has a fund raising schedule he is trying to meet and to contact him when they are ready to move forward. He is trying to reduce the amount of time he spends in sending ever more information to satisfy reluctant investors. He also requests promissory notes from interested investors to get faster commitments so he can move things forward and build momentum for getting the next investor on board. This is not the same struggling entrepreneur I knew a year ago - he is now a well-oiled fund raising machine.
It has been a long process to get his company to the stage where it has traction and can raise money in a more nimble fashion. There were many roadblocks that almost sunk his company before he could get to the stage he is at now, and his company is still not generating much revenue, but things are starting to look very promising and the expertise he has gained in raising funds can be translated into raising funds for other related projects that may require funding. We discussed working together in the future when his second round of funding is complete and he moves into the operational phase of his company's growth plans.
When developing a fund raising plan, you should account for your level of fund raising expertise and whether you have the expertise to close the full amount in one fund raise. Success in a smaller fund raise may lay the groundwork for increased velocity in raising funds for a second or third round. The road to raising funds is not without its stumbling blocks and near death experiences, but sometimes persistence pays off and you accumulate skills you never knew you had until you realize that raising money has gotten a lot easier because of the deal making, investor sourcing, and investor filtering expertise you have may have acquired from the fund raising school of hard knocks.