The Inefficient Fundraising Process is a Growth Barrier

Typical PE / VC Screening Funnel © feature image

The decision making process of investment firms needs to be simplified so that it works better for entrepreneurs, investors and society at large.

“Young companies can go broke while the founders are trying to get capital to fund the next growth spurt” — Havard Business Review

“Our survey found that for each deal a VC firm eventually closes, the firm considers, on average, 101 opportunities” — Havard Business Review

These two statements from the same publication could as well have been written by the same authors at the same time. That’s not the case, the first is by Jeffry Timmons and Dale Sander from Nov / Dec 1989 while the second is by Paul Gompers et al from the Mar / Apr 2021 edition.

That is twenty-one years where nothing has changed in the capital raise process for entrepreneurs. Twenty-one years where the process is still as highly inefficent as ever. There is arguably more capital available today than then but it is still extremely difficult for entrepreneurs to access this capital.

Investors commonly refer to the screening funnel — a ton of investment opportunities flow in at one end and at the other end, a tiny number get funded.

Typical PE / VC Screening Funnel ©
Typical PE / VC Screening Funnel ©

For private investment firms, the process is rigorous as it helps them minimise the chances of losing money. For entrepreneurs, the process is a terrible pain and it is not surprising that for a lot of entrepreneurs, it is just not worth it. This is especially the case for founders from underrepresented groups (women and minorities) who find it difficult scaling the first step of gaining access to VCs.

“Even for entrepreneurs who do gain access to a VC, the odds of securing funding are exceedingly low” — Paul Gompers, Will Gornall, Steven N. Kaplan, and Ilya A. Strebulaev HBR Mar / Apr 2021

The three big issues for entrepreneurs with the fundraising process are complexity, time and cost.

  • Complexity: As an entrepreneur, the most frustrating aspect of the fundraising process is the perceived complexity and lack of transparency. Earlier this week, I saw a message from the UK National Health Service indicating that I was eligible for a Covid-19 vaccine. On the website, the criteria was very clear and booking an appointment required two pieces of information. I qualified and got an appointment, if I did not qualify based on the clearly stated criteria I would get kicked out immediately. It is frustrating that investor’s approach to fundraising process is nowhere as transparent or entrepreneur-friendly.
  • Time: According to the HBR article by Jeffry Timmons and Dale Sander, “managers commonly devote as much as half their time and most of their creative energy trying to raise outside capital.” Surely, there has to be a better way than entrepreneurs having to invest so much time to gather, process and present information as requested only for an investor to make a snap decision based on gut feeling.
  • Cost: apart from the opportunity cost of focusing on fundraising rather than running the business, there are potentially significant cash outflows involved in fundrasing. These include financial advisors, consultants, flights etc, all without a guarantee of success.

I have heard several pieces of advice on how entrepreneurs should deal with this:

  • Raise capital well before you need it; by implication raise even if you may not need it;
  • You have to dedicate resources to the process, perhaps have a founder dedicated to fund raising while others focus on running the business;
  • You need to hire advisors and consultants to see you through the process, it is just too complex to deal with yourself

There are a few startups tackling the challenges with the fundraising process. At Caena, we are building tools to help entrepreneurs and investors simplify the process. We believe that when entrepreneurs are able to access capital more easily, the chances of success increase and when they grow, society at large benefits.

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