Growth5 Blog

Tuesday, March 2, 2010

Being Cautiously Optimistic When Raising Capital Doesn't Help

Yesterday I spoke with the CEO of a startup that was following up on why we chose not to go with them. I explained that although we thought they had a decent idea and a promising team, they had no specific plan for growth – no estimated timeline with milestones, etc... In fact, their only mention of the future was somewhat grim.

Granted, it's never easy to predict where your company will be in three months, six months, never mind three to five years, but I told him that I could absolutely guarantee that if there was no plan to get somewhere it would be difficult to raise money. Investors need some sort of context as to which point in the business time horizon they are investing, and where the business is trying to get to after their investment. This seems so obvious, but we see a lot of business plans that don't contain this info.

The CEO said that since they couldn't predict where they would be, they wanted to show that they were being realistic by not overplaying their future value – they wanted to be seen as cautiously optimistic. I politely told him they came across as overtly pessimistic and as a result left us with a lukewarm feeling about them, at best. I reminded him to let the potential investors discount the probability of a successful future, don't hamstring yourself.

The reason all of the "negative" legalese in subscription agreements is in the back of the documents is because if you led with it, you'd never raise a dime. "Our company is going to revolutionize the XYZ industry, but remember if for some reason our servers fail and we lose all of our data, we will be out of business within days. Also, please remember that through no fault of our own the Internet could fail and we would be doomed. Who's in?"

We recently posted about the 10 Skills an Entrepreneur Needs to Get Funded, see #5, Inspiration. See also, the Five Things I Wish Were in Your Business Plan - specifically #3 Milestones & #5 Value.

The CEO needs to inspire potential investors that they are partnering with a company on the move. "Here's where we started, where we've been, where we are now, and where we are heading. We are so excited about our future and the path we are on, you really should be a part of this!"

We learned first hand that being "cautious" and "realistic" doesn't win you any points or money – even during a market crisis. Throughout the tough capital raise environment of the last 18 months, it seemed like the management of a portfolio company was constantly lowering the value of the firm thinking that investors would see the "value" and make the investment. Turned out the complete opposite was true. Why? The cautiously optimistic/pessimistic value made the investment timeline seem less and less believable. "You were worth X 18 months ago, you're only worth slightly more than that now, how are you going to jump 50x in the next two years if you've only moved 1.5x in the last 18 months?"

"Um, because, you investors will finally come to your senses and see our real value?"

The company eventually went out at what they really believed the value of the firm to be and found it much easier to close on money. Investors believed in the updated path, it made sense. Achieved and upcoming milestones supported the higher value all along, the company had made the mistake of discounting themselves.

It's important to show that you are a realistic entrepreneur – you understand and recognize the potential pitfalls of your business, but I wouldn't lead with that. You can demonstrate that in the supporting info in the back of your deck / business plan. When you are presenting, being cautiously anything is not a smart move. You need to inspire. If at all, save the cautious for the Q&A when the VCs are testing your grip on reality.

Believe me, VCs have enough caution and pessimism to go around. You don't need to play that role, let the VCs, they are really good at it. Start with unabashed optimism and go from there.

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