Raising venture capital is one of the hardest jobs for an entrepreneur in any economy. But in a recession, it takes even more convincing to get people to part with their money.
Venture capital funding fell 26% last year to $19.2 billion, according to the Center for Venture Research at the University of New Hampshire. The number of projects that earned angel funding declined 2.9% during that time even though the number of active investors remained the same. Deals were 24% smaller.
Market conditions will require entrepreneurs to be more thorough, thoughtful and aggressive with their pitches. Angel investor Bill Payne, author of the self-published Definitive Guide to Raising Money from Angels, looks for endeavors that have management teams in place, a product or prototype to show, and interested customers. The company should have the potential to generate $30 million a year.
If you're trying to woo investors in a weak economy, be sure to have:
Experienced managers: At least one member of your team should be an expert in the industry you're targeting. Investors are reluctant to take a chance on an endeavor run by inexperienced leaders.
Accurate financial data and realistic projections: Investors will expect companies to explain in detail how they set their goals. Sales estimates will need to be attainable.
I recently attended a fundraising workshop held by FundingPost, a company that connects venture capitalists with entrepreneurs. One of the attendants pitched a plan to start a software company that he said would generate $400 million in sales in five years. But he had yet to develop the product he planned to sell. Investors will likely consider the business too risky to back.
There was an early-stage firm at the workshop that was trying to raise $15 million. That means if half of the company was sold for $15 million, it would be valued at $30 million. So the company would have to bring in at least $150 million in five years to get investors their minimum return. This would be difficult even in a healthy economy.
One of the presenters at the workshop used so many acronyms in his presentation that a veteran government worker would have been lost. Keep your pitch simple enough for a school-aged child to understand.