I’ve been to enough startup conferences in my life to know that funding matters. Yes, technology costs have been dropping for years, but at some point many if not most startups need to move beyond bootstrapping.
I was curious about entrepreneurship and fundraising. To this end, I recently sat down with Jenny Kassan, author of Raise Capital on Your Own Terms: How to Fund Your Business without Selling Your Soul. The following is an excerpt of our conversation.
PS: What was your motivation for writing this book?
JK: I’ve been helping mission-driven entrepreneurs raise money by using strategies that allow them to avoid venture capital for 11 years. I’m continually surprised at how many entrepreneurs, lawyers, and finance experts continue to think that the venture capital model is the only choice. The truth is that the venture capital model only works for a tiny fraction of businesses – those that plan to grow very fast, and then sell to a larger company as quickly possible. These are mostly technology and consumer products businesses. But 99.9 percent of businesses have different trajectories — they just don’t realize there are other options. It’s a waste of time for them to pursue venture-capital-style investment. With the book, I wanted to spread the word that you can design a capital raising strategy that works for your particular industry, goals, and values.
PS: You write that more than 90 percent of investment capital goes to male-owned businesses. Is the investment industry really that dominated by men?
JK: Yes, that is true. And it’s the venture capital industry that’s extremely male-dominated. As we’ve been hearing in the news lately, it can also be very unfriendly to women entrepreneurs. Stories have come out of women who have to deal with groping, propositions, and other inappropriate behavior when they’re seeking money from this source. It’s a sad story, but there’s a silver lining. Venture capital funding destroys the majority of companies that get it by pushing them to grow fast at almost any cost — which causes them to fail. Even VCs themselves acknowledge that only one or two out of ten companies they invest in will succeed. We hear a lot about the rare successes, the “home runs,” and far less about the much larger number of failures that result in wasted resources, lost jobs, and devastated founders. In fact, the average venture capital fund produces zero to negative returns, according to the Kauffman Foundation. So finding alternatives to this model is the best thing an entrepreneur can do to preserve her company — as well as her physical and mental health. Ironically, I think many women are lucky they have such a hard time getting this funding. We just need to make sure they know there are alternatives — and that’s why I wrote the book.
PS: Why are mission-driven investors so important? How does one go about finding them?
JK: All investors consider numerous factors when making investment decisions. Research shows that most investors care about much more than financial return: in surveys, a majority of people say that they would like their investments to be aligned with their values. A growing movement called impact investing is helping people find investments they can feel good about, knowing their money is doing good in the world, rather than just flying around an electronic marketplace run by algorithms. It is not at all hard to find investors that care about the mission and values of the companies they invest in. In fact, I believe appealing to investors’ values and what they truly care about is the best way to find the right investors and to have them happily say yes to your offer.
PS: What are some other tips for entrepreneurs looking to raise funds?
JK: The most important thing is to throw away all your preconceived ideas about what an investor looks like. Investors make up over half of the population of the United States. Venture capitalists, active angel investors, and other professional investors make up only 0.3 percent of the total population of investors. The best investors for you may be your customers, your suppliers, environmental activists, or residents of the community where you’re creating jobs. My book lays out a six-step process for designing your customized capital raising strategy — including how to identify your ideal investors, what kind of investment to offer, and how to make sure your offering is legally compliant. Most lawyers will tell you that you should only talk to “accredited” investors (a wealthy investor defined in detail under federal law). I disagree!
There is no legal reason why you can’t include everyone as a potential investor. On the other hand, it is true that the offering of an investment opportunity is a highly regulated activity. So be very certain that you are clear on your legal compliance strategy before you start talking to investors.