7 ways founders sabotage their fundraising

Have you ever owned a Sega Dreamcast? While you may recognize Sega as the name behind Sonic the Hedgehog, they also had an important history in the game console business.

They had good success with the Genesis console in the early 90’s. By the end of the decade though, the competition tightened with Nintendo 64 and Sony PlayStation trouncing Sega in the market. The launch of the Dreamcast in late 1998 was meant to leapfrog Sony and Nintendo with built-in internet support, innovative memory cards, impressive graphics and audio support, and backwards compatibility.

By 2001 though, Sega discontinued the Dreamcast and exited the console business. While technically superior, the product was no match for the combined marketing firepower of Sony's PlayStation 2, Nintendo's GameCube, and Microsoft's Xbox.

Does the best product always win in the market? It might be comforting if that were the case. As the Sega story shows however, that is not always how things work out.

The tech world is littered with numerous examples where superior technology did not win the day with customers. VHS beat BetaMax. Microsoft Explorer beat Netscape Navigator. And the one that stung for me, Facebook crushed MySpace, which was a vastly better social network for musicians like me.

It takes more than great technology to dominate the market. During my time at Siebel, we had started seeing Salesforce appear in some customer conversations. They were intrigued by the cleaner web interface and this thing called “cloud” and “SaaS” which meant much lower complexity and upfront deployment costs.

It was easy to dismiss the upstart CRM competitor. They had less functionality, no enterprise credibility, less robust customization options, and added risks by being deployed in the cloud. Siebel was clearly the better technology. Then they got decimated in the market by Salesforce which approaching a $300 billion market cap.

What changed? The market for one, which moved away from upfront per seat licenses to more flexible per month spending. Customers also wanted a better and simpler UX, which had been a struggle with traditional CRM tools. But mostly, Salesforce was simply better at telling their story of “No Software” and promoting higher user adoption among sales reps.

We talk to a lot of founders that struggle with fundraising. In fact, this is a universal struggle even with the most promising and well-connected of startups. When we dig deeper, it is clear that despite a big market opportunity, great product, solid traction, and an impressive team, they are hitting a brick wall when it comes to securing capital.

What's going on? Simply put they have a great product, but fail to market it correctly! Their startup is like a Sega Dreamcast; they have an awesome opportunity for investors, but investors simply do not notice or understand. Investors are looking for venture-backable startups, meaning startups that have a chance to generate a significant return, and they are simply not seeing that from these startups.

Marketing is a balance of audience, product, and timing. To that point, there are seven things that could be going wrong when raising capital from investors (if the market, product, traction & team are strong):

• They do not have a strong network

• They have a terrible pitch deck

• They lead with a weak story

• They lack external credibility

• They have a messy cap table

• They are not ready to raise yet

• They run a poor fundraising process

How can you course correct your fundraising process to tackle each one of these issues? The links above will take you into a previous newsletter to dive deeper into each topic. But if you just want to skim the highlights, read a brief summary on each point below.

Finding the Audience

Unless you were a VC turned founder or had an exit with your previous startup, most founders do not come into fundraising with a built-in network of investors. Even before you get a chance to pitch your startup, you need to find the right investors and figure out a way to connect with them. This means you got to get out of the building and network with a plan (but also not waste time at bad events).

Polishing the Product

The most common mistake is a pitch deck that does not demonstrate your potential. As someone that sees lots of decks, the vast majority fail to convey what makes the startup unique with big exit potential. VC's need billion dollar exits to return the fund, so you have to pitch with that in mind. You definitely want to build the best pitch to tell that story with the caveat to not go overboard.

The bigger issue with most pitch decks however is they simply fail to tell a compelling story as to why you are uniquely positioned to unlock that billion-dollar opportunity. All the VC pitch decks templates however are meant to put startups into a box to weed them out. Dump the templates! Instead you need to tell your story that explains the big vision behind your startup.

The next thing investors will do after looking through your pitch deck and story is to due diligence you and your team. They are looking for signs that you are credible, in other words validation of your subject matter expertise, industry credentials, or capability to execute at a high level. If they do not find you or come away unimpressed, they move to the next deal. The way to address this is to invest more in your online presence and building your personal brand.

One thing that can scare away investors that would otherwise invest is a messy capitalization (cap) table. Why? Because investors want an appreciable percentage of ownership but also want to make sure the founders and employees are properly incentivized through their equity stakes. Avoid this blocker and make sure you clean up your cap table before you fundraise.

Aligning the Timing

In the startup heyday of 2020 and 2021, it seemed every startup was getting funding. Now that the zero-interest rate spigot is dry, investors are much more disciplined in dealmaking. The bar is much higher now and startups need to demonstrate considerably more progress to secure capital at each stage of funding. Make sure your startup is in the best position and prepared to fundraise.

When startups do begin to fundraise, how they go about it is just as important as what they are pitching. Raising money from investors is so all-consuming that it slows progress of your startup. Plus, if it takes too long, you risk signaling to investors that you are not investment worthy. Therefore, you need a solid process to minimize distractions and risks of fundraising. Paul Graham, founder of YC, wrote a lengthy essay on a good fundraising process which we summarized to help guide the journey.

In some ways, the fundraising process is its own product. And just as you would market the product you are building, you also need to package up your fundraise to put your startup in the best position to attract and secure investors. If you take into consideration audience, product, and timing, you are already better positioned than 90% of the startups actively fundraising.

What has been you experience in raising money for your startup? Are there other consideration or tips that you would add to our seven points?

Mark & Basil

All of our talk about positioning the startup fundraise as “a product” sounds reasonable, but what are investors looking for on the other side of the table? In short, how do they evaluate startups they meet?

Our friend Arnaud Bonzom of Black Mangroves and active Angel Investor, shared an interesting post on LinkedIn on how investors evaluate startups. Actually he shared three frameworks from three different investors, so we are sharing his post below as well as three images of the frameworks shared by these investors.

Decoding the evaluation process for early-stage startups. Raising capital is a pivotal moment for early-stage startups, setting the foundation for their future growth and success. However, navigating this journey can be daunting, especially when founders are required to understand how they're assessed compared to their peers. The key lies in differentiating between what is merely good and what truly stands out as great.

Thanks to the contributions of Point Nine, FJ Labs, and Kima Ventures, the veil has been lifted on the metrics that matter most to investors. Jean de La Rochebrochard [of Kima Ventures] encapsulates the essence of what startups should strive for: "Knowledge = Trust, Execution = Credibility, Vision = Desire."

SaaS Funding Napkin by Point Nine

Marketplace Matrix by FJ Labs

Pitch Framework by Kima Ventures

Did you hit the subscribe button for our YouTube show MVP Labs? Basil shares insights on building MVP quickly and also stories from founders of fast growing startups about their journey of getting started. Check it out!

Mark was back in NYC this week to speak on a panel for a Gen AI Startups event in the AWS office. Mark focused his portion of the panel discussion diving into the considerations and risks of Generative AI and how AWS helps startups stay safe through Responsible AI features in Amazon Bedrock.

Next week Mark heads over to Morocco for the Connect Summit to discuss community building in the context of startup ecosystems. He will also connect with leaders inthe digital nomad community and startups in Morocco, which is quickly becoming a hotbed for startups and entrepreneurship.

Lastly, we are looking for contributors who may want to share their stories and insights into the startups with our audience. If you want to participate, send us an email and we would be glad to include you!