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Based on a 2014 analysis of more than 100 failed startups, CB Insights found that "ran out of cash" was a common cause of failure, second only to "no market need." Revenue doesn't always cut it, and so to fuel company growth, entrepreneurs often turn to outside funding, which is difficult to secure.
Fortunately, we talked with two Chicagoans willing to give their industry-tested tips for successfully funding a startup, ranging from funding advice to habits and traits that attract and turnoff investors. Read on to see what Jeff Carter, an angel investor, independent trader and co-founder of Hyde Park Angels, and Jeff Lyons, an entrepreneur, investor and co-leader of the Fullbridge XBA in Entrepreneurship at 1871, an ongoing class for budding entrepreneurs, had to say.
Be coachable
Investors like entrepreneurs that are coachable.
"I think that really means: does the entrepreneur listen to you thoughtfully so you can have an actual dialogue about the business and it’s not just their way or the highway," Carter said.
Be able to sell
Carter said this is a trait he looks for in entrepreneurs, and he stressed that it can be measured beyond product sales. For instance, if an entrepreneur has a team of employees, that shows he or she can sell other people on the mission.
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Attack a realistic problem
"I've heard people say, 'I want to solve global warming,'" Carter (pictured right) said. "That one might be a little too big to solve with a little software company. It’s unrealistic."
Narrow your vision and execute. Missions that are too grand can scare away investors.
Share a comprehensive spending plan
What will you do with the money? Every investor will ask that, and entrepreneurs' plans must be comprehensive. Non-technical people often underestimate development costs, and techies often underestimate marketing costs, Carter said. Therefore, investors respond well to teams with both skill sets.
Furthermore, Carter said plans that include high salaries for executives can be turnoffs.
"I don’t want to argue whether they’re worth it or not, but there has to be a realization that you’re working for the equity not the salary" Carter said.
Give yourself enough runway
Of course, as Lyons points out, financial planning comes into play long before talking to investors. Lyons, who co-leads the XBA class with Caroline Kim, said entrepreneurs need to give themselves as much runway as they can and bootstrap as long as possible.
To help give themselves enough runway, Lyons suggests that entrepreneurs intelligently use their resources (what they know, who they know and 168 hours each week) and develop several lines of credit — possibly via credit cards and/or home equity loans — before they become an entrepreneur.
Be open to convertible debt
With that said, Lyons stressed that first-time entrepreneurs are likely to encounter investment terms that favor the investor. And as an early-stage company, that's OK.
"The objective isn't to raise capital," Lyons said. "The objective is to build your business."
In Lyons' experience, convertible debt is the form that most professional local investors use for an initial angel or seed investment.
Seek advisors
[ibimage==45718==Original==none==self==ibimage_align-left]Lasting connections with industry-familiar advisors can also result in investment, according to Lyons (pictured left).
"There's an old fundraising adage that is still relevant for today's company founders: if you want money, ask for advice," Lyons said. "That approach tends to be less likely to elicit an immediate 'no' and may give the entrepreneur the opportunity to engage with an experienced advisor."
Supplement angel investment with crowdfunding
At the moment, Lyons said the most likely way to have success through a national crowdfunding platform is to already have committed accredited local investors, adding that in his opinion crowdfunding is best used as a supplement to angel investment.
He did note that could change in 2016, when Title III of President Obama's JOBS Act could take effect, enabling the general public — rather than only accredited investors — to make limited investments.
Find one or more co-founders
Referencing "The Founder's Dilemma", a book by Noam Wasserman, Lyons said entrepreneurs need to ask this: do you want to be rich or do you want to be king?
"[Wasserman's] research would indicate that if you want to be rich, you’re much better off with one or more co-founders." Lyons said. "You’re much better off taking outside capital and having a smaller slice of a bigger pie, and your economic outcome is much likely to be better if you take that approach. But, you’re going to lose a lot of control in the process."
Study first
Don't wait until you're an entrepreneur to study the market, your business and your financial resources.
"While there are several active entrepreneurs in the class who are launching or growing early-stage businesses, most of the participants are contemplating whether or not they want to pursue an entrepreneurial venture," Lyons said. "They are actively considering business ideas and are in the Fullbridge XBA program to build business and entrepreneurial skills that will help them be successful, whether they co-found or join an early-stage venture this year or later in their careers."
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