Jenny Kassan is an attorney and investment consultant who is absolutely dedicated to helping entrepreneurs find the right investors for their business. To call her passionate about it might be as much of an understatement as saying she’s an expert. Kassan, in fact, wrote the book on it, which I reviewed for this site. Raise Capital on Your Own Terms: How to Fund Your Business Without Selling Your Soul (Berrett-Koehler, October, 2017), lays out just what it takes to find the right investors. For women and minority entrepreneurs, it’s also an invaluable roadmap away from the old boy’s network of venture capitalism — to investors that believe in you. I was thrilled to get the chance to chat with Kassan about fund raising, the bootstrap trap, and how to make entrepreneurial dreams come true.
So many entrepreneurs are left out of the funding equation. How did you realize there were so many other kinds of investors out there besides venture capitalists?
When I started working as a lawyer helping entrepreneurs raise funding I just happened to be working with an attorney who knew about some very successful businesses, like Ben and Jerry’s Ice Cream, that had raised money from their customers and communities. I started helping my clients use that model with great success. It was only later that I started learning about the venture capital model of funding and it seemed silly to me compared to the model I had been using! Why would anyone choose to raise money from someone who is going to become their boss when you can raise money from a supportive community on your own terms.
Why shouldn’t entrepreneurs just use their own resources and self-fund, so they can maintain control of their vision? In your book, you call it “the bootstrap trap.”
Most businesses need funding to be successful. If you try to run and grow your business without outside funding, what usually happens is that you don’t hire any help so you wear all the hats in your business – you do your own bookkeeping, marketing, sales, web site development, etc. You have almost no time, energy, or creativity left to do the part of the business that is your unique genius. It is almost impossible to have a thriving business under these conditions. Yes, you can use personal credit cards, tap your retirement account, etc., but using your own personal assets puts immense stress on you and your family. Having outside investors allows you to share the risks and rewards with others who want you to succeed.
What proportion of women entrepreneurs are actually able to raise the capital they need to see their business come to fruition?
Every entrepreneur I have ever worked with who has used the strategy of raising money from her community has reached her fundraising goal. It hasn’t always happened quickly, but eventually it does happen because the money is out there – you just need to keep asking until you find the right investors.
What are the key steps an entrepreneur should take before looking for investors?
It is essential to create a plan before starting to talk to investors. There are two reasons for this: (1) without a plan you will waste a lot of time chasing opportunities that are not a good fit and (2) without a plan, you could inadvertently violate the state and federal laws, called securities laws, designed to protect investors. My book provides a six-step process to create your plan so that you target the right investors and do it without breaking the law.
What goes into a winning pitch for investors?
I don’t even like to use the word “pitch.” I prefer “conversation.” When talking to a potential investor, start by asking questions. What is important to them? What investments do they have that they absolutely LOVE? What frustrations to they have about their investments? Really listen first and then tell them about your business and why you care about it. Be authentic! The right investors will be attracted to your commitment and your passion.
Why would an investor be willing to take a lower return? Doesn’t that go counter to the idea of investing?
A lower return than what? There are a lot of myths out there about what a “market rate” return is. For example, the stock market is paying very high returns right now, but many experts believe we are in for a big “correction” – when you average those periodic market drops in with the periods of high returns, the average return is, of course, much lower. Similarly, with venture capital investing, VCs are looking for a 10x return (meaning they want their investees to multiply the investment ten times within ten years. But do VCs actually make 10x returns on their investments? Not at all! Even in a successful VC fund, only about one out of ten will make a 10X return. According to the Kauffman Foundation the average VC funds makes a zero to negative return. I would rather invest in an entrepreneur that I know and trust who is offering a reasonable return.
How do you know if an investor is a good fit?
Because you will be having two-way conversations with potential investors, it will be easy to tell very quickly whether they share your values and see your vision. If they don’t, no problem. You can end the conversation fairly quickly and ask if they know anyone who might be interested. Also, when you design your offering to fit perfectly with the goals and values of your business, you will naturally attract the right investors and repel the wrong ones. The more potential investors you talk to, the better you will get at quickly discerning whether there is a fit. Don’t take it personally if it’s not a fit – just keep going until you find the right ones.
For more about Jenny Kassan and her new book: Raise Capital, visit jennykassan.com