One of the first things prospective clients often ask us about a business plan/fundraising project is “What’s your track record?” or “What percentage of the companies that you’ve helped have been funded?” These are fair questions, but the answers aren’t straightforward.
First and foremost, we never promise companies that they can raise money. Such promises are typically made in an attempt to win a client’s business, but we believe a third party cannot make these representations in good faith. Once management has been introduced to an investor, a company’s ability to raise capital is based on the merits of its business plan and the ability of management and the investors to reach a mutually acceptable deal. Our work is centered on getting the company ready and making sure that management puts its best foot forward. But, deals can fall through in ways that beyond our control. For example:
- Founders want to retain too much control. We have had clients reject term sheets because the founders decide to retain control, often at the 11th hour.
- Investors aren’t sold on the team. No matter how good your business plan is, an uninspiring or inflexible management team can derail the deal.
- The management team changes in the process. When the management team changes, so can an investor’s interest.
- Intellectual property is not as strong as presented upon due diligence. If the business has low barriers to entry and the IP is not very strong, that can be a deal breaker.
- Due diligence raises red flags. Good investors do a fair amount of due diligence, including background checks on your entire team. What they discover can change their interest—although they often won’t relay this information back to the company, they will just declare they are not moving forward.
- First offer syndrome: Founders often assumes that a quick offer is a bad offer. Some investors move quickly, and we have seen founders who stated that they would be happy just to get funding change their stance once the first term sheet is in hand. Investors do not want to offer a term sheet to be used as leverage and will often lose patience if they feel their deal is being “shopped around.”
- Parties cannot agree on a valuation or terms. This obvious problem is the most common sticking point in a deal.
- Entrepreneur decides to do something else, i.e. take a full-time job. We have seen founders get attractive offers yet go back to their previous business or to school.
For all these reasons, we get paid for our time on fundraising projects. Results are measured in specific deliverables, not the ultimate outcome. What we do guarantee is that we can help position your company in the best possible light for investors and, where appropriate, provide introductions to investors and guidance through the fundraising and due diligence process. Although a business needs to stand on its own two feet at the end of a day, first impressions can make the difference between fundraising success and failure.