Startup Funding: Pitfalls and Takeaways

Aug. 16, 2018

BY TARA MATAMOROS CARTER

 

Money isn’t a mystery anymore. The general public is more aware than ever before about what venture capitalists (VCs) and investors want to see from the founders they choose to support.

One main reason is that more people have been able to secure funding in more places far beyond Silicon Valley, both nationally and internationally.

A rising tide of funding is beginning to flow to startups outside California, according to the 2018 VC Outlook. This has raised all boats, providing wider access to funding for startups by women, people of color and other under-represented ecosystems around the world. Although these trends are promising, it’s crucial to note that funding levels were at such a low point before now that even slight movements might appear exaggerated in their import. According to research by CB Insights, 87 percent of founders who were successful in financing their companies were identified as white, only one percent were classified as black entrepreneurs and 12 percent were considered ethnically Asian, although how they defined race was not addressed.

As a fascinating follow-up, they noted that 89 percent of the founding teams that secured funding were composed of a single race – 83 percent were white only–while 11 percent of startups founder groups were racially diverse. That clearly does not represent the makeup of the country or the startup community, which indicates that there are likely many highly profitable economic engines out there being starved for cash before they can prove themselves.

Another factor contributing to the awakening awareness of the startup funding process stems from popular culture’s hunger for shows like HBO’s Silicon Valley (renewed for a 6th season) and Sony’s StartUp (renewed for a 3rd season). These insider stories peel back the PR gloss and show the true - often ugly, but sometimes simply ridiculous - nature of business at the collision of dreams and finance.

The third link in this awareness chain comes from UCG (user-generated content). On social networks, new media sites like Medium, and personal blogs, entrepreneurs have generated huge bumps in traffic by telling their personal war stories about funding sharks and roadblocks to innovation.

Take a brief walk alongside these successful founders and VCs for insights into where they stumbled and what they learned along the way:

1. Don’t diffuse your energy

Preethi Kasireddy, was a blockchain engineer who secured funding to launch her own company TruStory with extremely rare angel backing. But she had to leave Silicon Valley to do it. Her path led to LA and a more receptive environment.

One of her most painfully won takeaways from the Silicon Valley scene: avoid educational meetings with VCs. She wrote, “VCs love to set up casual meetings — coffees, beers, whatever — with people who they think can offer them valuable insight into an industry or trend. As an entrepreneur, you ain’t got time for that…. The time, mental horsepower, and physical energy you expend in every pitch meeting is immense — and expending all that for an educational meeting is frustrating and generally never worth your time.”

Her experiences and genuinely emotional stories contain many other valuable gems for hopeful founders, such as:

  • Preference enthusiasm. A relationship with an committed partner at an unknown VC firm beats a lukewarm reception at a well-known firm.
  • Set a time limit for fundraising. Put time pressure on VCs and yourself. Often less than a month is an effective time limit for a seed deal, as it communicates urgency and helps build buzz in the investor community.
  • Don’t meet with your preferred VC first. Polish your pitch at lower priority VCs and take as many questions as possible to be as ready as possible when the big meeting happens.

2. All the “no’s” in the world add up to nothing

Arlan Hamilton made it against all the odds -- in a place where most VCs (and founders) are white, male, and wealthy. Now, she’s the one both funding and supporting underrepresented founders at Backstage Capital and Backstage Studio. She makes it clear that she’s not “helping” anyone. She is pumping resources into an underfunded ecosystem for the ecosystem itself to reap the benefits, grow, and eventually empower other underrepresented talent.

Despite her radiating positivity, even Arlan has had to voice her frustration after a verbal commitment fell through, as they often do, highlighting all the obstacles she had faced so far. In a podcast series that documented her struggle to find funding, Arlan said, “The VC world is not a very inviting place. I didn’t think it was going to be like a camp or something, where everyone was hugging, but…. It kind of sucks here. And I think that there are a lot of people who would be happy if I got frustrated enough to leave. I’m so much more jaded than I was before.”

She stayed and her willpower won. In her own words, here’s what sustained her through disappointment and rejection: “I would say my success—I don’t feel successful yet—but the journey to it has to do the fact that I see a few years into the future, and I walk towards that path, and I can’t stop. It’s a dogged determination, it’s a resilience that I can’t explain to you why I have it, but I can go through the 99 no’s and one yes, and get back up.”

3. Prioritize relationships and stay on task

Alan Chan won the title of Asia Investor of the Year for his winning track record of backing profitable startups through Vectr Ventures in Hong Kong. One of the first funding lessons Chan learned from his mentor was to back founders, not products. The reverse side of this practice for founders would be: Only work with those who believe in you as a person, not just your idea. A founder may have to pivot many times and test out multiple concepts before they hit the right combination of winning factors. Your relationship with the VCs will have to have begin on a strong foundation to survive the hard work and lean years ahead.

Chan also typically warns founders to resist the natural urge to celebrate too early. His advice might sound harsh, but too many startups have crashed simply from a loss of momentum. Chan advises, “Don’t talk about anything, don’t go on panels, don’t go talk about entrepreneurship, because you just started anyways. Go to work, build your product, go get the market. Don’t waste our time doing these other things” that entrepreneurs are supposed to do, according to the media. Those actions certainly feed content channels, but often at the cost of your fledgling business.

4. Know your investors as well as yourself

Founder who make it are those who know their strengths and finds partners that balance them, improving coverage in their weakest areas. That takes an incredible amount of self-awareness and research on your potential funders. From the start, research helps you tailor your pitch to exactly what each investor needs to see from you, but there’s a much bigger issue here. What successful founders get from their investors is not just money but honest and well-reasoned advice from someone who cares about your ideas. After countless patronizing dismissals from VCs who couldn’t recognize the market potential of her app, Michelle Kennedy finally discovered the right investors who were uniquely able to offer “invaluable experience in product areas that would be crucial to her startup’s success.”

5. The ultimate unheeded advice

One piece of advice shared by founders and VCs repeatedly, but very rarely followed in practice, is to never take any of it personally. It is going to feel personal because your ideas and maybe even your life will be on the line. You’ll have to toughen your skin, though, to be able to shake off insults while still being able to absorb authentic criticism. Every denial is a teacher. If you take it personally, it will grow increasingly problematic to endure the superhuman stress levels, the periods of sleep deprivation, the off-hand remarks by those who don’t understand what you are trying to do, and the flint-hard rejections from those who held out hope to you. Will it all be worth it? Ask those who have persevered.

BY TARA MATAMOROS CARTER
STARTUPS, FUNDING