Top 8 Reasons Companies Fail to Raise Money
And What You Need in a Pitch Deck to Win
By: Bob Norton LinkedIn
Entrepreneurship and tools for it have exploded in recent years. You could even say most anyone thinks they can be an Entrepreneur. Of course, more than 80% of new businesses still fail within five years. Mainly because people greatly underestimate the skills and effort needed to create a new business model. For purposes of this piece I am defining Entrepreneurship as only doing something brand new. It is not starting another dry cleaner, franchise or restaurant unless there is something very different about the business model. Of course, some people will make money with a good recipe and excellent execution, it is just not a business that can attract risk capital for growth until after it is financially proven.
Many newbie or wannabe Entrepreneurs think the first step is to develop a “pitch deck” to raise funds but this is backwards thinking. A pitch deck can only be developed with a series of other underlying work done first. I get requests to develop pitch decks almost every week and see many online requests that have a budget of $500 or less. Some I talk to really want you to develop their entire business model and plan and have nothing but an idea. Often a bad one. They have not even done the basic market research or competitive intelligence. They have no real business model design and, even worse, often no real experience or team with the right skills to validate the business can work. This is folly. They essentially just have an idea. Ideas are literally worthless. Even a patent (an idea you “own” exclusively) might only get 2% to 5% of the revenue to build and sell that product or service based on the patent. So, expecting anyone to turn your idea into a business model and deck for you that will raise funds is usually lunacy, unless you want to spend tens of thousands of dollars to hire a team of people in marketing, sales, management and more. Of course, there are those that will be happy to take your money and tell you they can. And those that will believe them and lose their shirting working for literally years on a bad plan created by a writer, consultant or contractor, not a businessperson.
A pitch deck is the result of many skill sets integrated. It must deal with strategies for marketing, sales, product/service development, finance and operations at a minimum. All art forms at the strategic level requiring at least ten years’ experience in that art. The deck/plan requires input from highly experienced people in all these areas and usually weeks, or even months, of market research, competitive intelligence and far more. This can usually be done alone only by an highly experienced CEO (10+ years in teat role), or alternatively, by several high-priced consultants with 15+ years’ experience in each of the key areas. One person must have experience running a significant business (50+ employees ideally) for at least 10 years. This is a very rare Consultant. Most are very narrow specialists in a technical area. I would guess only 1% to 2% have the scope and business experience to do a deck or plan without help of other experts.
Buying template pitches and business plans is a recipe for failure because if your business is not differentiated you should not be doing it. Unless maybe it is just a local retail or service business serving an area without any competitors. Not real entrepreneurship as defined here.
Here are the most common mistakes and wrong beliefs I see often that a company must avoid if it want to raise outside capital before having positive cash-flow:
- Thinking raising money from investors is easy. It is not. Just because you read about financings every day, for the 5,000,000+ businesses in the U.S today does not mean you can do it for your business. There re narrow criteria that risk capital investors look for which must be present in your business. Ninety percent of small companies, or more, will never raise significant growth financing except through credit cards, friends and family, or after cash-flow is solid for 18+ months. Sure, anyone can get credit card debt or factoring of receivables when they have some cash-flow, but those high rates will catch up with you and likely slow you down or stop you completely later. Most companies need some equity financing or low interest rate capital unless their margins are exceptional. You must have a top 5% business model, team and deck to raise funds. Also a large market opportunity, differentiation and sustainable competitive advantage (more on that later).
- Not spending the time and money to come up with a long-term financing strategy as part of the business planning process. There are 50+ categories of capital to tap into as a company starts and grows. Most likely a company needs to use a few of these along the way. However, unfortunately institutional venture capital gets all the press and attention as the sexiest or whatever. Less than 1% of people who try, and maybe 0.1% of all financings involve VCs. Like in any sales process targeting the right people first is job one, otherwise 90% or more of your efforts are likely wasted. This depends on many factors and needs the coaching and guidance of a finance specialist, or a CEO that has “been there and done that”, ideally a few times before.
- Believing they can hire someone (cheap, overseas, etc.) to develop their deck, business model or business plan for them – Wrong! The Entrepreneur must bring the inspiration and work in understanding the market deeply, unless they want to pay $25K+ to have someone else do all the work listed herein. Anyone good enough to do all these things will charge $200-$500+ per hour, or need to receive a chuck of equity with a discounted rate. After all they are already successful and are likely already running their own business. The alternative is hiring a few lower price experts in each key area. But this requires lots of communications and collaboration and can get expensive unless it is sweat equity work. If they are not expensive by the hour, what makes you think they can do a business plan or deck? So, the only way you get their attention is to pay them what they are worth and earning elsewhere already, and/or give up some equity. Offshore B-Plan and pitch deck writers are most often a waste of time and money and will only create a façade of plan or deck, not a unique one that can be successful. Do you really think you can get a quality plan from anyone charging $20/hour? Yes, you want to believe that, but it is not true. Ever. Contracts can be used to spiff up the graphics design, subcontract some market research, or competitive intelligence or other pieces but never to merge all this information and create a unique business model. So, this belief is like shopping for the lowest priced anything. You get what you pay for, never much more. And this is the foundation of your business. SO you are doomed with a poor one.
- Thinking an ad agency, marketing firm or any other “technical specialist” can develop the pitch deck for you. Now unlike #3 these people are not cheap. They are experts in a narrow area. A pitch deck can only be done once a quality business plan is complete. It is just a summary of that. They cannot do the prework, creative business model design and other key inputs into the business model. It is not their expertise. I saw one of these presented recently. It was a disaster even though the company had serious potential. It showed a total lack of understanding of what investors need to hear and made the company management team look incompetent – even though they were all very experienced (big company) people. No clue how to pitch or run a startup though. So, they will undoubtedly add years or months to their capital raising cycle until they correct this issue. That is a specialized expertise.
- Not articulating a clear Market Entry Strategy or Go to Market (GTM) Strategy – I made this mistake for my first startup. Venture capitalists wanted me to exactly define my “best” customer. Turns out our market niche was already small and targetable enough in other ways and we were successful in spite of this problem, but we never got money from a venture capitalist as a result. Through perseverance and a great opportunity, we did get a $34 million strategic financing deal from IBM instead. That was 1991-1992 and the VC market had shut down effectively due to the first Persian Gulf War. However, a GTM strategy is a must have today that smart investors look at closely.
- Not communicating, or even having a “Sustainable Competitive Advantage” (SCA) – Investors invest for the long-term seeking an exit plan in about five years typically. It could be shorter or longer in certain scenarios. If you do not have that “unfair competitive advantage” then the upside for investors is likely not there or worth the high risk because the long-term upside is limited. Too many competitors will copy what you are doing in years 3 to 5 and make the company worth very little, competing on price and getting low margins. This SCA can be intellectual property, trade secrets, copyrights, or a combination of things but you need to show some real advantage over all the copycats that will emerge if you are successful. These are usually a barrier to entry that keeps out most potential competitors.
- Not understanding that startup investors take huge risks and therefore require huge rewards commensurate with that risk. This often means having unrealistic expectations of the valuation you can get on your company. Some people expect 10X what they can get in this marketplace. Every Entrepreneur thinks their business is a slam dunk. Yet statistically 80% or more will fail, even after significant financing and successfully going through the gauntlets of due diligence and fundraising. Even professional VCs often have an 80%+ failure rate. Their returns come from only the 10% that are big winners usually. There is another 10% called “The walking dead” who will be lucky to pay the invested capital back just by just surviving. If you do not have a SUSTAINABLE competitive advantage you cannot generate the returns high risk, early-stage investors need. They will see that and walk away from your deal.
- A weak management team and lack of awareness of that fact – Now this is the hardest to see and you must be brutally honest without yourself and your team. I have a tool to make this an objective process I use. At each stage of development and higher amount of money sought the quality of the management team required increases. You may be able to raise friends and family money without an experienced team, but it is unlikely that sophisticated investors will do more than listen to all your ideas and invest in someone else, maybe a competitor, unless you have assembled a good team with lots of experience. Recent college graduates with an idea, counter to common belief, very rarely get money without an experience CEO attached to them. There is almost always an experienced CEO brought in before any significant funding. VCs need to see a passionate, committed CEO with a track record of success. In fact, some VC will tell you 80% to 90% of their decision is about the CEO and team. Because a good team will fix any other problems. Angels will accept a lower quality team at the earlier stages but want to see a Founder that is coachable and knows their limits who is open to a professional CEO coming in later. Ideally someone who has been a CEO for 5+ years before and even made money for investors in the past. Integrity is also crucial. This means volunteering weak areas of the business to show you understand them and are focused on managing those risks. VCs often invest knowing they need to replace the CEO and enhance the team over time, especially when the initial year is technical hurdles or figuring out a sales process or validating the GTM strategy. They know they have the path to control this outcome by controlling the board of directors. Usually by a Series B and sometimes by the Series A they effectively control the board and can replace the CEO at will. To scale a company (after proof of concept) a full team with some gray hair, and startup experience is a must have, not an option. Exceptions are rare, sure Bill Gates, in a totally new industry who had plenty of software sales before he took any money. Naming any others gets very hard. People forget Microsoft was selling Basic interpreters (1975) long before DOS, Word and Excel, and did not IPO until 11 years later in 1986 too. So, he kept full control, mainly by bringing in money late, and had many years to learn to be a CEO too. If you do not have at least three people on your team, in the key risk areas (usually Product development, Sales, Marketing and/or operations) with 15+ years’ experience each you will likely not be taken very seriously by most investors once you are looking more than about $500K in funding.
Do all these things well and you might be in that top few percent that get term sheets, angel investors and other sources of capital. It generally requires an outside coach or consultant because insiders are too close to the issues. Leave any one of them out and likely your chances decrease significantly putting you in the 90%+ that will never get money from anyone but friends and family.
Bob Norton is CEO & Chief Consultant at AirTight Management. He has grown two startups to over $100 million in sales and helped about 200 other companies launch or grow specializing in helping companies scale and install the systems and infrastructure needed to scale, raise capital and develop sustainable competitive advantage. He develops strategic plans, financing strategies and pitch decks for clients. He can be reached at Bnorton@AirTightMgt.com.
What the iterative design cycle should look like to preapre a business model for pitching and launch.
CI = Competitive Intelligence
The key for any new business is “differentation”, and a corresponding niche/narrow target market that needs that differentiator. This makes marketing and sales more efficient during market entry, gets your cash-flow and customer feedback going and validates your offering and teh systems to support it too. All keys to achieving traction, funding and growth.