Raising Capital is Not a Numbers Game
By John M. Armstrong, PhD, Managing Director
I recently listened to a new entrepreneur relate their experience that while raising capital is hard, if they get a “NO” from 10 VCs and finally get a “YES” from one, then they should be okay. Statistics say otherwise. Another entrepreneur this year shared that they have reached out to dozens of VCs, all of whom said NO, but they plan to keep trying. They are wasting their time and their shareholders’ investments. Some people think that raising institutional capital is a ‘numbers’ game but taking such an approach can actually hurt your chances of success (and likely will). More on that later. The secret to successfully raising capital is strategy, and by that, I mean strategic positioning, targeting, and timing.
With regard to strategic positioning, while having an asset that shows promise of delivering improvements in clinical outcomes may pique the interests of licensing partners – or even some buyers – it won’t be enough for investors. Without a capable and dynamic management team experienced in business leadership, the best science or technology in the world will not be enough to convince VCs to invest capital. Institutional investors put capital to work in companies with management teams that have ‘done it before’ and know how to bring a reasonable rate of return within a defined timeframe. If raising capital is your goal, and you are the scientific co-founder of your ‘best thing since sliced bread’, then understand that you need to step away and/or step down to allow an experienced CEO and CFO to communicate the value proposition.
Regarding strategic targeting and timing, Outcome Capital’s Dr. Oded Ben-Joseph and Thom Busby make a salient point in their article Attracting Venture Capital in the Life Sciences Industry: a Data-driven Approach. They note that because “the venture community is both relatively small and close knit (many venture groups engage in routine discussions with one another), a targeted approach allows a company to maintain control of its financing process and prevents “tainting” the market by having one venture group pass on the opportunity and influence other venture groups to do likewise.” Anyone who has gone through pain of failing to raise capital may glean a bit of insight into the reason for their failure from those words. However, if you have not yet embarked on a capital raising journey, heeding this warning may save you time, pain, and failure. In other words, if your baby is worth getting to market and requires raising outside capital, then it behooves of you to “do it right.”
To go out and attempt to raise venture capital as if it’s a numbers game is worse than playing slot machines at a casino, because with institutional capital, the more you lose, the more the odds are stacked against you; at least this cannot be said for the casino industry. To be successful in raising institutional capital requires professional strategy. At Outcome Capital we always say, ‘Strategy First, Execution Second’, and this is a good example of why we say that – raising capital is not a numbers game, and Outcome Capital deploys strategy to do it right the first time.
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