New Jersey needs more growth companies.
According to United Van Lines, 67 percent of New Jersey moves are outbound; more people leave the Garden State than any other state. According to the National Association of Realtors, median property values in New Jersey increased from 2005 to 2018 by 9 percent, the second lowest of all states; median property values in Pennsylvania over the same period increased by 48 percent.
It’s the taxes. To paraphrase Churchill, “Trying to tax oneself into prosperity is like standing in a bucket and trying to lift yourself up by the handle.”
New Jersey needs more growth companies to bring in wealth from around the world. Think Rome in 100 AD or Silicon Valley today. A central pool of capital and talent feed off each other to supply an international network: funded companies result in new wealth that leads to more new companies and more high-paying jobs — or the outright sale of the company, which, in funding parlance, is called an “exit.”
According to Crunchbase, the average successful startup since 2007 has raised $41 million in venture capital and exited for $242.9 million dollars. If you’re wondering who in New Jersey has raised $41 million since 2007, you are not alone.
That magnitude of investment and return is virtually unknown here. For example, New Jersey is home to none of the 171 U.S. “unicorns” — private companies valued at over $1 billion. One might think that New Jersey would lead in healthcare unicorns, but they are overwhelmingly in California, New York and Massachusetts. A unicorn called Clover Health was founded in New Jersey, but moved to San Francisco.
Because I like living in New Jersey and because most people have only one question about starting a business, these next two Perfect Company columns attempt to answer the question, “How do you raise money?” The answer is separated into principles and sources of funds. First, the principles:
An investment involves selling a percentage of your company for a certain amount of cash. In my experience, negotiations seem to start at 30 percent of the company. If you will need more capital later, sell less of the company in the first round.
A business is a succession of good ideas, not a single idea. When you start a business you usually focus on a single product or service, but investors are interested in your vision. Amazon started selling books because they don’t spoil, are uniform items, and have many more SKUs (stock keeping units) than could be found in a retail store. Books gave Amazon a big win and a chance to hone its skills, but Amazon wasn’t about selling books; it was about selling everything online.
There is no perfect business idea. Many businesses happen only because the entrepreneur wants it to happen. Imagine trying to finance “a new pillow.” Mike Lindell was so passionate about his pillow idea that he sold his other businesses to finance it. MyPillow has sold more than 41 million pillows and now sells every sleep product from mattresses to pet beds.
There is no perfect way to raise money, and there are no hard-and-fast rules. People will try to tell you, “This is the way it’s done,” but don’t believe them. The terms of your agreement and the amount of equity that you sell will depend on the growth and profitability of your company, the current business environment, and what you are willing to accept.
The time to sell is when people are buying. Generally, you can only raise capital for new ideas in an up market, which is why many money-losing unicorns have rushed to go public: they are afraid that the window of opportunity for selling shares will close. When the market is crashing as it was in 2008, you can’t sell a machine that turns air into gold for a penny an ounce. You can start a business in a downturn, but you’ll probably have to finance it yourself.
In my experience raising money takes about a year. When you start promoting your business you discover your prospects’ many objections, but also the ideas that excite them. After a year your pitch has improved and some of your prospects have gotten to know you and the business. Your business may also have improved because of the feedback. Persist: funding rarely happens immediately.
Simplicity sells. I was once on a conference panel on this topic with five others who had each raised several million dollars — except one who had raised $70 million. “I found,” he said, “that the simpler my message and the fewer PowerPoint slides, the more money I raised.” Entrepreneurs are fascinated by the details of their business; investors are not.
Adopt an appropriate attitude. The process of raising money is both exciting and demeaning. Many people will never get back to you, which is maddening, but to be expected: no one likes to deliver negative news, and no investor wants to be the one who turned down the next big thing.
Royal de Luxe raises money for an extremely weird business: one-off, giant marionette street-theater. The founder had the healthiest possible attitude toward fund-raising: “I tell people, ‘This is what we are doing,’ and I see who wants to come along.” You don’t have to be arrogant or fawning. You are carrying out your vision, and you’re looking for people who want to be part of it. Most will not, but it only takes a few to make your vision a reality.
The perfect business plan does not exist. In the early 2000s, I was seeking funds for my Internet startup in a down market. Consultants kept saying that we could raise money if only we had an excellent business plan, which I commissioned for just $10,000. The next consultant looked at the new plan, rolled his eyes, and made the same offer. Exasperated, I asked a VC for an example of a great business plan that I could use as a model. It never came.
Richard Harroch, a contributor to Forbes, says that business plans for start-ups are a waste of time because they are time-consuming, no one reads them, and they are quickly outdated. Instead, Harroch says, spend your time on a good, short pitch deck (a PowerPoint presentation), build a good prototype, thoroughly research your market and your competition, and prepare detailed financial projections.
Write a paragraph about your company, and say it all the time. “We solve this common problem by providing this innovative solution. About X million people could use our product, and we charge this much. We sell the product by doing A, B, and C. So far, our product has 218 reviews on Amazon and a rating of 4.9 out of 5. This product is our first step in creating a broader solution for this large market. Would you like to invest?” A single paragraph will help keep you focused.
Qualify your investors. Investors focus on their own narrow rules that prevent them from investing in your company. For instance: “we only invest in our own time zone,” “we are only investing in biotech right now,” “we are seeking companies with at least $2 million in sales and 50 percent annual growth,” or “our minimal investment is $25 million.” Many of these people will talk with you, but if you don’t fit their parameters they are wasting your time. Ask them about their investment criteria before making a pitch.
Selling is harder than making. You can make almost anything today — and surprisingly cheaply. The hard part is getting people to change their habits and adopt your product or service. The chief competitor for most startups is “do nothing.” People are busy; why would they want to get involved in new work that’s going to save money and reduce the number of jobs?
Most entrepreneurs assume that the world will beat a path to their superior solution. Not so. Include a healthy margin in your price for marketing. Investors want to see sales growth, and they want to know how their investment will increase sales. Growth is so important that many profitless, growing companies are worth billions of dollars.
You are not as important as investors say you are. Investors and acquirers will flatter you and say that you are the reason they are investing in or acquiring your company, but you are just another cog in another shiny wheel. Investors look at many companies and tend to view executives as replaceable commodities. It’s one way of viewing the world but one that threatens your vision, and you should be aware of it.
The most successful companies in the world are not run by financiers, but by founders. Financiers are opportunists; founders are builders. A venture capitalist once confided, “My job is to separate entrepreneurs from their hard-earned equity.” Don’t be naïve that your goals and your investors’ goals are aligned.
One popular funding game is called, “hockey stick.” Many investors disdain an idea that will not grow exponentially, so entrepreneurs create outrageous projections that show an investment followed by a rocketing growth curve that looks like a hockey stick. The world rarely works like that. Think of the successes in your own life: you got involved in something and subsequently discovered a new idea that succeeded. The main event is that you got involved: you bought a ticket to opportunity.
The failure of hockey-stick planning is so axiomatic that there is a word for it: pivoting — as in, “These espresso makers and coffee beans aren’t selling; let’s pivot to European-style cafes called Starbucks” or “Burbn, our gaming app, isn’t selling, but people seem to like the photo features; let’s pivot by stripping out the other features and calling it Instagram.”
Don’t lose control. How you structure your fund-raising will determine your long-term success. You will hit many bumps in the road, and you will need to confidently deal with the problems. Watch the movie “The Social Network,” and see how Sean Parker helped Mark Zuckerberg secure control of Facebook. Read how Sergey Brin and Larry Page control Google. Some investors complain, but founder-led companies dominate the list of the world’s most valuable companies. Financially driven stars of the past like IBM, Sears, and GE have faltered. A business needs a strong vision, so protect yourself in the funding process.
In the next Perfect Company article, I will present sources of capital.
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