Entrepreneurs Need To Know ‘The Establishment’ When Raising Capital
(As appeared in Forbes.)
Human nature prevails in funding circles like in any other. Investors, like most people, are drawn to the popular, the pretty and in some regards, the safe. They are drawn to the ‘establishment’ candidates.
In a season when we’re hearing a lot about the establishment in politics, there is an establishment at work in capital circles. If you’re not part of it, your groundswell of grass roots support may simply feed your ego but not get you to the deal table.
You raise more capital faster from the inside
People that are part of the establishment have spent time developing relationships with the important players. If as an entrepreneur you need only $50,000 to get to your next stage of growth, that could mean understanding which individual in your regional bank has the direct influence to approve your loan.
Nothing is gained by meeting with 5 low-level bank employees. If instead, you learned that your sister’s neighbor is the head of a local bank, spend some time at her house and get the introduction. If you want to move faster and smarter, get the introduction from the successful serial entrepreneur you know to the most influential local bank leader—not the person in charge of consumer credit, the person in charge of business loans.
To move fast with capital, you need to understand who has the power inside the institution and get inside with them.
Yesterday’s news was yesterday – Recency helps when raising capital
Early entrepreneurs often say their ‘brand’ is working to their advantage. That is true if the brand can be used to gain momentum, garner press or gain a meeting with an important collective. But to be relevant at the deal table, you need current momentum and current coverage.
As a marketer, I remember many Websites with press sections that had success stories or news coverage from the year before. We no longer live in that world. Your mother may care about that ink, but the people making deals want to know what was said yesterday and what is about to hit the wires tomorrow in relation to your business.
It is essential as an entrepreneur to have a forward-looking content strategy and be working to shape the news of your category and your customer’s reality. The more you do this with reliable sources—and establishment sources—the better this coverage or content will reflect on your chances to raise capital.
The establishment backs a mass-market winner
Investors keep their capital working in all markets, but they change where they invest. Establishment investors will get their multiples by moving where the multiples exist. According to PitchBook, private equity investment activity has slowed but the big boys are still winning. In fourth quarter of 2015 companies with enterprise values exceeding $250 Million were still delivering nearly 12x multiples.
If establishment investors can get 12x multiples on an enterprise play, they are not going to spend time on a niche player that hasn’t established their enterprise value.
Have you defined your business value in terms of the enterprise or your category’s ecosystem? The more sophisticated you are in this arena, the more successful you will be securing capital anywhere.
It’s OK to be anti-establishment until you want to be part of it
Many entrepreneurs get a leg up with alternative funding or non-traditional sources of funding. While this can be a great early strategy, it isn’t scalable. The money gets too expensive at a point.
Consider alternative funding as your ‘primary’ strategy, but not your ‘general election’ strategy. Even anti-establishment players have a long-term strategy. Use what you can from those that will take a risk on you early, but have your strategy ready for moving mainstream. Know when you’ll need to transition to the middle and have the traction you need for establishment capital.
There are some that feel crowdfunding will be a new, more democratized ecosystem for capital. When I interviewed Aubrey Chernick in November 2015, he talked about the promise of crowdfunding for creating the ‘new 98%’. He sees crowdfunding as the vehicle that will tap into the capital of the 98% that do not participate in the establishment capital machine.
No matter how anti-establishment crowdfunding may appear, there are many rules, there is a process and still a very small club of entrepreneurs are making a go of it.
Are you ready to join the establishment?
Keep your lofty goals focused where your customers and product roadmap is concerned. Get more pragmatic with your capital strategies.
If you seek to be a high-growth entrepreneur or a serial entrepreneur, spend time figuring out how the established system works, work it to your advantage.
The laws politics, business and human nature prove themselves time and again to be true.