Have you ever wondered how startup investment works? In the latest #GISTTechConnect webinar, host Clare Fairfield, chairman of the Venture Capital Institute, moderates a discussion between entrepreneurship experts to explore the opportunities and challenges that come with startup investment. Panelists include Elizabeth Gore, president of HelloAlice.com, an artificial intelligence platform that connects entrepreneurs with resources to help their businesses grow, and Rosemary French, an entrepreneur working to develop early-stage biotech startups as the senior program manager for product development at the Cancer Prevention and Research Institute of Texas. Elizabeth and Rosemary help to provide a detailed overview of the often-complicated process of raising capital for a venture or idea. The panelists share the knowledge that they have gained from their professional lives to answer questions from a live audience of global viewers. Here are some highlights from the Q&A session.
What are the different types of investment that startups can receive?
Elizabeth discusses many different funding resources and suggests that aspiring entrepreneurs find time to study all of them. First, she mentions equity-based fundraising, which entails giving up portions of ownership of your company to investors in return for their investment. In addition to this traditional form, Elizabeth encourages viewers to consider other options, such as funding from loans, credit unions, microfinance and government programs. Many countries have an equivalent of the U.S. Small Business Administration, where the government gives eligible businesses a small loan or grant as they are first beginning to grow. Oftentimes these government grants may be incentivized for women, ethnic minorities, or military service professionals. Perhaps the newest resource Elizabeth notes is crowdfunding. In her opinion, for product-based companies, crowdfunding is a great way to raise brand awareness while receiving money. However, she believes that the best source of funding is the money you already have. She urges entrepreneurs to manage their funds carefully and to think about existing resources before seeking new capital.
When should a startup start considering raising capital?
Elizabeth doesn’t believe that every startup should give up equity in exchange for investment, but she does believe that it is the founder’s job to be constantly thinking about raising capital from the day they start their company until the day they launch their IPO. Founders need to think ahead to make sure they have secured enough funding to keep their business afloat. It is also important to keep in mind that the type of investment your business targets may evolve over time. Rosemary mentions how she previously worked at a startup that raised most of its money from grants, and used the grant money to further develop their product and ultimately attract investment from venture capital firms. In her experience, there is a time and a place for the right type of investment.
Conversely, the panelists explain that a startup may not want to look for investment if they are already raising capital from other sources. For example, if a business already has a steady cash flow from customers, the panelists recommend not seeking out other sources of capital unless it is considering expanding, such as through an IPO. Raising capital from customers is a much better scenario than raising money from investors because it gives entrepreneurs more freedom and ownership over their business.
What are some things to be aware of when looking for investors?
The panelists agree that an investor should be someone who is a strong mentor. As a startup founder, you want an investor who has been in their industry for a long time and is an expert in the space that you are working in. Investors should be someone who can open doors that you can’t, by making introductions to other investors, corporate strategic partnerships and key industry players who can help your business develop. Overall, the panelists believe that investors should be reputable and valued in the investing space. Down the line, other investors may want to know who is already investing in your business, and you will want your answer to carry a positive connotation rather than a negative one. Big investors will have a lot of influence in a company; therefore it is important that you have a good working relationship with them.
What is some advice for startups to avoid making common mistakes?
Rosemary notes the necessity of building networks and making use of the resources around you in the early stages of your business. In these early days when your business does not have a lot of capital, you will need to rely on your network for advice. Make connections with industry experts who can evaluate your technology or give insight into how your business fits into the competitive landscape. It will help to build these networks well before launching your business.
Elizabeth discusses the concept of “getting to ‘No’ fast,” as she believes moving on after hearing “No” from an investor is better than being upset by rejection. “If it’s not a fit, then it’s not a fit,” she says. If investors are not passionate about your idea or don’t understand your work, that does not mean you are wrong. It just means that it was not the right money for you. She finds that it is really hard to walk away from an investment, but it is important to learn from each “No” to find where you need to improve your strategy.
What is the most valuable lesson you have learned for your career as an entrepreneur or investor?
In Elizabeth’s experience, she learned the hard way that the biggest mistake an entrepreneur can make is taking the wrong investment, whether it be the wrong type of funding or from the wrong person. Elizabeth confesses that it is easy to bring the wrong investors to the table when you are extremely passionate about your idea. When starting her business, she was so focused on making her ideas a reality that she let the desire to raise capital cloud her decision process and ended up making some wrong choices for her business.
Rosemary says she has come to understand that failure is positive, and is to be expected in every entrepreneur’s life. In her experience, she found that investors like to see failure in an entrepreneur’s past, because they know that you will learn from those mistakes and build from them in the future. She also stresses the importance of listening to your instincts. She believes you can know when partnerships or ideas aren’t working, and should be able to make the changes that you feel are right.