The Financing Landscape Today
By Bob Norton
Note: This article was written in 2004 and has been updated, though evolution of the market has continued traditional expectations in 2013 still seem to have faded.
The financing landscape today has change radically. Everything you learned in the last 5 years is obsolete. We are back to looking like the early 1990’s again as everyone has “moved up the food chain” one to two levels. True Series A financings with money designed to develop the product are very rare and most first institutional investments are in companies with proven “traction”, this means lots of sales completed. In the past there were usually TWO rounds of financing before this was required, one to develop the product and another to accomplish the first several sales by testing the sales and marketing processes. This means you need to get much further on much less money. This can mean adding a service component to your market entry strategy, corporate partners or many other strategies but unfortunately it will mean certain death for the majority of first time entrepreneurs who do not have a well formulated and proven financing strategy and plan.
Companies literally need to design their business plans around these conditions or risk failure. These The are many way to tune your launch strategy to require much less capital. Today you need to get to a breakeven level faster, and certain milestones must be met at the right time. Early-stage capital is much harder to get, may cost equity or even be completely unavailable for certain stage companies creating a huge gap for what used to be expansion financing in late Series A and Series B rounds. Many companies will fall into this chasm if they do not plan well in advance. You need a capital raising plan for the next two years at all times which includes multiple steps/rounds.
If your company is a picnic, then the financing environment is the weather. You can not change it! You need to adjust your plans to it — before you head out! Understand this because may great companies and ideas will fail only because they have an unachievable capital path in today’s environment.
The Traditional Financing Lifecycle
Now lets zoom in on the “old” early Stage Space.
Now Lets look at 2002 to 2004
A different world where lots of good companies will fall into the precipice that used to be the “Series A to Series B stage” financings in the $1.5MM to $5MM area that angels can not usually do and VC are not doing much of today.
Bottom Line: You NEED to adjust your business plan in
major ways to account for this reality!
Mr. Norton offers a flat rate consultation session on financing to help young companies identify what they don’t know yet and get their company ready. Most young companies jump in much too early. Not only is this a waste of time and effort, but it shuts down your best contacts early and prevents you from getting to other investors those would refer you to.