Our year has started with a flood of curiosity about Venture Capital not just in how to raise funding but in consideration of how funds…
Our year has started with a flood of curiosity about Venture Capital not just in how to raise funding but in consideration of how funds work, what it takes to get a job at a venture capital firm, and whether or not VC is broken or needs to change. Certain of 2022, given the recent years of innovation, entrepreneurship, working from home, and the "Great Resignation, the world is considering the role of venture capital.
Years ago, in a discussion of private equity, I shared an observation that Venture Capital Firms are rather like the philanthropists of our economy. That notion, then was met with some derision as it was the brief era in which Venture Capital was increasingly criticized for not funding everyone. Granted, Venture Capital is incredibly high-risk investment and not analogous to a non-profit, it seeks a return on that investment and indeed looks at financial metrics in consideration of an opportunity, and yet, more and more people have been awakening to the fact that Venture Capital has Social Impact. The notion as remained a bug in my brain, and in our experiences with things like Founder Institute's VC Lab (exploring new models and investment theses in venture capital), it is increasingly clear that it's a fact not without merit.
Hence, some context to what I want to explore with you here. That there is more to raising capital than a pitch deck and evidence of traction, because what Venture Capital investors are seeking, the reason they all invest in great risk likely to fail, is because their interest is far more than financial. They seek impact. And in appreciating that need for impact, we can better appreciate that raising money isn't analogous to the Sales Funnel throughout you just churn contacts until you close your round, it's more like a flywheel: a cycle with which, over time, your impact grows, and delivers greater value and opportunity to investors.
Businesses and startup founders learn early of a critical methodology in sales referred to as a funnel. Developing products and services, marketing is the process therein by which organizations get to know potential customers and then profile people so as to better understand the needs and motivations.
The goal, of course, being the conversion of people as buying consumers or business partners.
Around the turn of the last century, advertising executive Elias St. Elmo Lewis developed the idea of the funnel; first noting in The Western Druggist, in 1899, that the function of advertising was “to catch the eye of the reader, to inform him, to make a customer of him.” Little more than a decade later, his thesis developed, noting that advertising is meant “to attract attention, awaken the interest, persuade / convince.”
In time, studies of his work broke down this funnel into four stages: awareness, interest, decision, and action.
Not an unreasonable way to think about raising capital, is it?
Throughout most of history, this funnel made complete sense and helped businesses and marketers profile people and plan campaigns to meet the expectations of each piece of the funnel. This is the most renown and celebrated process in marketing and sales! The organization would work together to reach more people, improve the process of moving people from one stage to another, and to uncover new channels through which to reach others or introduce new products with funnels of their own. All to close a customer.
It's even obviously applied in our work in media.
In 2014, David Edelman and Francesco Banfi, with McKinsey & Company, proclaimed The funnel is dead.
While a concept easily considered and explained, it neglects too much. How do we know what product to bring to market? What do we do when an audience doesn't yet exist? Is that the end? Do we not continue to engage, support, and consume what has our interest?
Edelman and Banfi called the end of the funnel because the touchpoints between a brand and an individual are so great and varied (in large part thanks to the internet), that it’s no longer meaningful enough to treat the customer journey as simplistically as a funnel.
Raising Capital is NOT a funnel with a start and an end. The investors you want are on a journey with you and seek more than that close of a round or return on investment.
The touchpoints between a startup and an investor are so great and varied (in large part thanks to the internet), that it’s no longer meaningful enough to treat the investor so simplistically as someone you’re pitching.
“Without the ability to understand their customers, companies will find it difficult to be where their customers are,” added Edelman and Banfi. “Part of the reason that companies are having trouble understanding their customers is that customer behavior itself is complex.” If the connections I'm drawing here aren't smacking you upside the head, replace the word "customers" with "investors"
Without the ability to understand investors, startups will find it difficult to be where their investors are. Part of the reason that companies are having trouble understanding potential investors is that investor behavior itself is complex.
“The channel-surfing customer of today is often expanding the set of choices and decisions after consideration. Customers now are also often actively engaged with the brand – and their friends and peers – after they’ve bought the product or service using social media and the Web.”– Edelman and Banfi
The funnel is dead.
If you’re familiar with the concepts of centripetal force, a flywheel directs energy at the center around which it’s moving and as momentum is applied to our center, a greater velocity is experienced as we move further from that middle.
Raising capital, we might [over]simplify our approach to investors and rethink a “funnel” along this flywheel. Here's the funnel:
Marketing’s funnel is dead and so too should die your perception that this is a narrow process with an end in mind. Having secured capital does not mean you’re done, does it?
It’s paramount to appreciate foremost as a founder that your relationship with investors never ends (unless you choose to make it so or otherwise neglect them). Having received the action in our flywheel, an investment, we keep the wheel spinning right back around to awareness as we create awareness of the funding itself, what it means, and as we publicize and promote our plans as a startup from here. That in turn creates greater awareness with investors and opens up new opportunities at greater valuation.
Modern marketers grew beyond the funnel as bright minds realized that so too does the customer journey continue. Some added Retention and Referral to the funnel, noting how our work continues as we support customers, serve partners, and can work with both to grow their interest in our business as well as how they spread the word about the products or services offered.
What spins at the extreme edge of the velocity we’re accelerating is not just securing the funding but the role that these stakeholders play throughout the stages of your startup.
Before being funded at all, our audience is investors. We’re creating velocity with (momentum with) the investors in whom we hope to create awareness and opportunity. As our wheel spins, some investors, before being our investors, become supporters. These are investors who take the time to have coffee, give a little feedback here and there, introduce you to others, and join your LinkedIn page or Facebook group. Such supporters are relationships that you’re developing with people meaningful to your venture, people who can and will get more involved, with advice. Some supporters become advisors and with even greater momentum, advisors become your investors; investors who keep spinning the wheel as supporters themselves, at least, some more so as formal advisors (Board Members perhaps), and with enough velocity, such investors will participate again in future rounds of funding.
Flywheels are acted upon by three fundamental considerations:
The ventures most successfully fundraising all three in mind.
As with any flywheel, its speed is increased by applying force where most effective and efficient. This is where shifting your point of view from a funnel really shines because as a funnel, your mind is probably fixated on “meeting investors,” “contacting investors,” or “pitching investors,” you’re at the top of the funnel, haphazardly trying to toss more into your process with that elevator pitch > 10 slide pitch deck > financials > term sheet being your funnel to close. That isn’t how it works.
If your startup hasn’t yet created much, or yet established sufficient opportunity, apply force there and get your wheel in motion: Create an opportunity, consider the diligence an investor would do on your startup, invest YOURSELF in some growth or attention, and investors will take note. If your startup has an opportunity, say you have a patent you can license, but you’ve not invested your time and effort into turning that patent into a commercialized venture, apply more force first there and get your wheel spinning.
As we spin, we’re going to encounter friction. Friction slows our flywheel; while you may still someday secure funding, you’re adding months to the time it will take, because of misalignments or pressures preventing your momentum. That licensed patent isn’t just an opportunity with potential, it’s a friction that needs to be released with the right agreements and terms; if that patent holder has restrictions in place: friction. Does marketing agree with and align with what your product roadmap is planning to release? Are you connecting with investors where they’re found or where you find convenient for your sake?
Finally, and very seriously, appreciate the weight and size of your flywheel because this is a set of considerations that often makes founders question their sanity. Such as: More customers is actually a heavier flywheel.
Let me repeat that: More customers is a heavier flywheel. Why are established companies less nimble? How do startups accomplish what innovative companies with immeasurable resources can't?
That oft cited advice that it’s all about the customer or that the customer is always right? In innovation, within startups, it’s rarely entirely true.
A heavier wheel requires more energy and momentum to spin. Customers come with expectations, demands, and bias; customers can mislead, and customers can distract.
But before you go doubting customers and thinking that I’m implying that you want a light and easy to spin wheel, appreciate too that a heavier wheel produces a greater energy as spun (that established company has far greater momentum because of customers - weight). Density of your flywheel creates a momentum that’s more difficult to arrest but likewise a wheel that takes more effort to spin. Support your wheel with an exceptional team, a competitive advantage, and operational excellence, and you have a wheel created with density that will perpetuate with more velocity as you get it up to speed. Your team spins the wheel and the place to first spin isn't as a product or startup but with supporters and advisors connected to investors; as that wheel spins, the cycle of engagement about your startup spins more naturally and easily:
Notice how the cycle doesn't end, there is no conclusion nor is there a start. You job is to come in at any point in the flywheel with least friction, most need, and most potential, and drive momentum. Start with Advisors or creating Awareness, make sure your MVP passes the muster of Due Diligence or build a more substantial community of Supporters - as each point on the wheel improves, put more effort into another consideration and accelerate.
With a flywheel in mind, we can approach the process of fundraising from any number of viable points on our wheel. Now, with this in mind, those blog posts, pitch decks, advisors, and incubators become meaningful in spinning your wheel so that you’re not just spinning your wheels.
Before I let you go, let me bring us back to my first point. Impact. Talking to an investor just to close capital and return value in their investment, is a very narrow view of impact. In a flywheel, that capital engages more supporters, creates new advisors, develops solutions and partners, and opens new doors to greater opportunity. Capital fuels experience and teaches the team who may not succeed this time but will likely try again. And the wheel spins thanks to the impact of Venture Capital.
Our work increasingly throughout the world has startups also asking why Venture Capital is such a challenge from U.S. investors into startups in other countries. Appreciating the flywheel helps but here are some other thoughts on the challenges between countries; plug them in on that Due Diligence consideration of your flywheel.
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