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This story is a good argument for careful planning and targeted fundraising. Understand how much money you really need and how much you want, and do your homework to study your alternatives and what’s realistic.
You have to know which knobs to turn. Spend your time on things that have a reasonable chance of success. You never want to scatter proposals far and wide; instead, study potential investors and target them carefully.
This comes up today because of a story last week by Brent Bowers in The New York Times, “Love Your Idea (Don’t Want to Finance It)”, a variation on a common problem.
Patrick Brooks, 62, has a good track record and an interesting business idea. He’s licensed rights to a Savile Row trademark, “Henry Milbourne & Son — established 1769.” He wants to use that name to market men’s clothing over the Web. Investors, however, are saying “maybe.” Here’s more:
Mr. Brooks is snared in the Catch-22 paradox that bedevils many entrepreneurs who have come up with a promising product and marketing plan: Investors are reluctant to open their wallets until they see a functioning business. But it is difficult to create a functioning business until the investors open their wallets.
In this case, it wasn’t exactly the track record problem. Patrick Brooks has the often-missing track record:
In 1989 he started Bio-Dental Technologies with $16,000 in savings and built it into a $33 million distributor of dental products before selling it to Zila for $35 million in 1994, making a seven-figure profit for himself.
His other big money-making adventure was engineering reverse mergers, in which he created public companies, combined them with privately held firms that wanted to go public without dealing with a lot of regulatory problems, and cashed out. He completed eight such transactions, he said, grossing about $2 million.
The NY Times story is full of investors saying nice things about the idea, but not writing checks. It’s not an encouraging story:
Mr. Brooks said he had contacted about 500 angel investors and angel-investor groups and 40 venture capital firms and boutique investment bankers over the last year to raise the $2.5 million he thinks he needs. But only nine have put up any money, including his former wife. The total he has raised so far is $475,000.
At this point, however, I hope you’re starting to wonder about this. With due respect, contacting 500 angel investors and 40 venture capitalists is not the way raising money should be done. You use a careful aim–targeted investors whose interests match your situation–not a shotgun.
Several investors quoted in the story agree. One said:
“Unfortunately, startups like Henry Milbourne often find themselves in no man’s land when looking for capital between $1 million and $5 million,” he said. “The capital requested is too small to attract big institutional investors.” On the other hand, it can be difficult to raise even $1 million from acquaintances or angel investors, he said.
The lesson here, quoting a phrase from Stephen Fleming’s series on raising capital, is Pick Investors Carefully. That’s Part 4 of Stephen Fleming’s Academic VC blog series on raising money, and this is a good simple explanation of how and why you want to do this. I posted about Part 9 of that series last week. This one is also–no pun intended–right on target.
Tim Berry is the founder and chairman of Palo Alto Software and Bplans.com. Follow him on Twitter @Timberry.
