Getting Funded Guide

How Easy is it to Get Funded?

We all have heard wonderful success stories of people who made it from their garage to a billionaire just on pure hard work and dedication. Steve Jobs was a maverick innovator, Mark Zuckerberg in his dorm room got this amazing idea of connecting people that changed the world, Jeff Bezos was just a poor Cuban immigrant who got the great brainwave of saving people going into shops and getting their stuff delivered to their doorstep from around the world.

After a string of rejections and bad luck, they persevered until some forward thinking Silicon Valley investor realised how much money could be made with these innovative ideas and entrusted their millions to Steve Jobs, Mark Zuckerberg and Jeff Bezos.

And they weren't disappointed. We all love these 'rags to riches' (or rather regular Joe to billionaire (or at least a millionaire) stories, because they give us hope that we can make it same way they did! We just need to focus and persevere. This is the side of the story you read on Forbes, New York Times and The Daily Mail. Why? Because those stories inspire and therefore, sell. But there is another side to the story you don't get to know about. The finance world is a tough, matter-of-fact world which is all about money.

The Road to Venture Funds

If you have a great idea, how do you build a whole business infrastructure from it and put a team together to run it?

On what resources will you keep it running until it gets enough clients to become profitable, or until a rich investor will want to put their money in it? To get the resources to start it and run it, do you borrow from your family and friends, re-mortgage your house, use up your savings from the old jobs you spent 5-10 years in a 9-5 routine in, to finally save up enough to branch out on your own? How do you market for suitable investors? Do you just google up large companies in your field of business, or bank or an investment fund emails and start sending them marketing emails, hoping they will catch interest? Most people doing this, don't get very far. What you know matters as much as How much you have and WHOM you know.

Setting the Scene for Your Funding - the basics

When you get all those three, the next matter is How you negotiate. How do you think Jeff Bezos, Mark Zuckerberg and Steve Jobs retained control of their companies? Or did they? If they didn't, who did?

This opens a whole new rabbithole which could be fascinating read for those who like detective-like thinking. Now about you. Imagine your sold your house, got your friends together and started an IT company. IT is great as it requires relatively little infrastructure and could be run just on one or a few laptops and servers. Say, you sell an innovative app that would be a nice niche for the likes of Accenture or Infosys. What typically happens is a buy out. If the big players think they can make billions with your app, they may buy you out. Yes, depending on how you negotiate you may retain your director status in the company and you will most likely oversee things for a while one way or another, until they get comfortable enough to run your app and all that goes with it, on their own. What happens most often though is, you become a head of a newly created division of their company (or a daughter company owned by them) under the name of your app. Whatever the formalities, names, structures and job titles, you become essentially an employee.

Which is, to be frank, fair enough. Because who takes the bigger risk in all this - you who sold your house for say 300K and put it all in your app, or they who banked say 50 million on this? It's pure business.

Approaching VC Firms

All reputable funders will take a cold, hard look at funding propositions that come their way, as they have to justify risking their money by painstakingly evaluating key aspects of the funding proposals they get. Nobody will spend much of their time in looking at funding proposals that do not survive a cursory initial assessment for feasibility. It is much easier for them to say no than to say a yes.

Why? Because they know people they already deal with, but they don't know you. Therefore, good first impressions are crucial for your chances to get a funding offer.

Your Pitch Deck

What you need to present carefully from the start need to include information like:- 1) how much of your own money have you put into the project, how will you service the lending/ investment (do you have pre-buyers, have you got any credible evaluations of how much profit you are likely to generate in sales in the next 5-10 years?); 2) your relevant experience, credit score and current debts and assets; 3) the viability of the industry itself; 4) the security/ collateral aspects of the funding and crucially, the viability of the profit that can be made on the project and its exit plan (whether that be a sale, or an IPO, initial public offering), for the parties concerned. There is hardly a project owner who doesn't think their project is great.

There is hardly an investor who will part with millions of their money just because the project owner thinks their project is great. 90% of projects presented to financiers do not adequately cover all these key aspects and therefore, most project owners fail to get past go. When rejection takes place, it is often difficult for project owners to get back into play, especially if this happens after some kind of formal due diligence has already been done on the project and its owners, with the necessary credit checks. That is because, these kinds of checks tend to leave a negative footprint in a relatively small marketplace. Therefore, when presenting your project for funding, to avoid rejection and getting a reputation of getting rejected among financiers (this world is quite small at the top by the way and information spreads very quickly), you should do your best to ensure that all the above mentioned items are covered in your pitch to financiers which the financiers will consider prior to offering you engagement.

Pre Close Costs

There is lot of controversy about pre-close costs these days. Yes, generally, say when you go to a bank with a mortgage request, they take your documents, do credit checks for free and come back with a yes or no, and their standard terms. Even so you usually need to put in a fixed deposit for them to actually lend you the money. Venture capital is a much more complicated field than mortgage lending. There is a whole lot more of moving parts, risky aspects. Expert reports and valuations are typically necessary to make investors feel safe, and nobody cares about what your own personal accountant or lawyer thinks about your project.

The likes of big accountancy firms are likely to get involved, and not because your personal lawyer or accountant can never be as good as them, but because they have professional insurance investors can bank against, should their advice go wrong. Then there is also the cost of actually reserving the money. If you talk about debt finance, money has to be reserved for funding you which means it is taken out of play and is not making more money. They cannot do overnight loans, they cannot do currency trades on it, it just lies there reserved for you and depreciates.

Therefore, given the fact that it is your right to pull out of the funding at any time, investors will cover their risk and losses by asking you for a security deposit to reserve the funds. Which means that you may have to find a bridge loan!

Using Law Firms for Capital Raise

Given the fact of how extremely complicated it can be for people who had never been involved in venture capital funding before, to manage all those moving parts and make investors feel safe, a new industry branch is emerging.

There are reputable international law firms emerging whose key people are used to managing multi million litigations and negotiations on large commercial investment deals. They are trained to think as investors do, but they work for you as their client.

Next time you think of selling your wonderful app to one of the big players (or do whatever else you have in mind), think of how much more of a level field you could be on, when negotiating with the biggies, if you had a team of deal closers and professional lawyers behind you who think like the investor, but work for you to achieve a win win arrangement between you both.