In logic studies, it’s called “survivorship bias” – unduly focusing on people or organizations that survived a selection process, and overlooking those who didn’t because of their lack of visibility. It happens all the time. People tend to think “anyone with a pretty face can make it in Hollywood” because the only actors you hear about are – well – the actors who “made it.” At best, it’s a toothless logical fallacy that paints a rosy picture of the world. At worst, it encourages reckless ambition, untouched by the material knowledge and real-world risks of pursuing certain goals.
Survivorship bias is alive and well in startup culture, especially pertaining to capital raising. Articles tend to focus on organizations that graduated past the seed funding stage to become success stories, extrapolating universal nuggets of advice from that success. However, these biases can mislead upstarting entrepreneurs.
In this article, let’s work to correct some of those misconceptions. We’ll still draw inspiration and insights from successful thought leaders, but let’s do so in a way that’s realistic about the capital-raising process. According to thought leaders who’ve seen the process first-hand and are honest about their experiences, here’s how capital raising really works, warts and all.
A Credible Investor Leads the Way
Investors are like everyone else; they gain confidence in numbers. And they look to eminent peers for guidance on how to spend their money.
To illustrate this point, Regan McGee, founder and CEO of Nobul, shares a story of the first real estate industry event he attended. Speaking with Medium, he recounts talking to a venture capitalist (VC) about his criteria for investment. The VC was blunt: he follows what other major VCs are into.
“If you want to take your high-growth tech company from startup to successfully operating at scale,” says McGee, “you need a highly credible lead investor. Without that champion, everyone else will shy away.”
Entrepreneurs (Unadvisedly) Drop Everything
Too few entrepreneurs realize just how slow capital raising can be, and how – if you let it – the process can distract you from your core competencies to the point of harming your fledgling business.
Jeffrey A. Timmons, credited with writing one of the first theses on entrepreneurship, wrote a piece for the Harvard Business Review all the way back in 1989 that touched on this issue. “The lure of money leads founders to grossly underestimate the time, effort, and creative energy required to get the cash in the bank,” claims Timmons, writing alongside Humacyte CFO Dale A. Sander.
As entrepreneurs hustle for meetings and wait for investors to complete their due diligence, “the emotional and physical drain leaves little energy for running the business.” Before long, entrepreneurs may neglect existing customers, employees and early investors in the pursuit of big fish funders. It’s a cautionary tale for young entrepreneurs in keeping perspective throughout the capital-raising process.
Life After Investment Looks a Little Different
In the cheekily titled “What to Expect When You’re Expecting (to Raise Capital),” Intrepid Investment Bankers partner, Jim Freedman, highlights what comes after you raise capital. Namely, he describes the whiplash some entrepreneurs feel when facing new restrictions and requirements – or, as he calls it, “post funding blues.”
Capital raising can be a process of making concessions. What was once your darling idea is now beholden to investor interests, which can feel strange. An investor might take a seat on the board, limit profit distributions, or – at the very least – demand robust quarterly reporting.
To avoid letting these restrictions throw you off, plan for them in your strategic roadmap. More importantly, make peace with the idea of ceding some control. It’s all part of doing business.
Don’t believe people when they tell you that capital raising is all smooth sailing. Instead, prepare your business accordingly by understanding a) how VCs operate, b) how to focus on your best use throughout the process, and c) how to cope with life after investment.