Fundraising: Strategic or Tactical?

It was a week dominated by news about chatbots. Facebook is rumored to announce a chatbot store for Messenger later this year, and Microsoft’s Tay chatbot got shut down in less than a day, after users taught it to tweet racist statements.

I was following these stories from Estonia, where coincidentally, one of the meetings I had was with a company applying intelligence in matching recruiters to job-seekers based on skill analysis. The conversation with the founder quickly turned to one of the age-old horror scenarios of artificial intelligence; taking over the world, leaving people jobless and out of demand by computers.

The interesting thing with technology is that it is getting better and better at automating repetitive human tasks, but artificial technology is still very primitive at replacing human judgment. I caught myself thinking that I’m probably on the safe side as someone who spends most of his time building human interactions, creating and managing new business opportunities. This  is because in business development, human judgment is all-important in getting to revenue. To people taking out their wallets and paying for something new that could solve their problem.

So in short, business developers, sales people, marketing strategists and brand storytellers should not be worried about AI stealing their jobs. In fact, the ones that should be worried are early-stage company founders.

When early-stage companies are starting to validate their product and revenue, they very quickly come to the moment when continued growth requires adding great talent to the team. New team members who can bring new business. When we look at non-capital intensive and non-research intensive technologies, 100% of pre-profitability fundraising circles around the need for financing business development.

In fact, I have come to believe that all early-stage fundraising can be divided in two mutually exclusive categories: tactical and strategic.

1. Tactical fundraising

   Fundraising to develop the first prototype, create a runway for a series of user tests, product experiments, and experiments to validate first revenue can generally be considered tactical. There is usually a given team with a given problem that they’re trying to create a solution for, and the need is for an amount of pre-seed financing to ensure a timeframe in which these experiments can take place, without the requirement to create and maintain the growth of MRR. In the old, pre-internet distribution days, only this was considered to be the “startup” phase, and the amounts needed where usually large; teams needed to build infrastructure, rent or build labs, hire engineers or researchers, and build something that could be tested with users. Today, in the age of near-immediate distribution opportunities (internet, app stores, crowdfunding platforms), this phase in a company’s life is shrinking every day. With the generous amounts of public and corporate startup capital being deployed almost anywhere, you could say founders are well-served with opportunities. In 2016, leaving a job for a few months to work on a startup project has become a ubiquitous opportunity. I call this al because the financing is needed only to “feed” the founding team through a period of discovery processes, which are tactical in nature. Short iterations, user research to prototype loops, a series of experiments.

2. Strategic fundraising

   The moment the product is out, and focus shifts to getting, maintaining, and growing revenue, it’s strategy that overtakes tactics. The strategy is revenue. And it’s at this point that the founders’ main worry becomes the ability to secure market skills. Unlike engineers, business developers are much less randomly distributed across the world. Great engineers usually can be found in places with good educational systems and plenty employment opportunities. Business developers, in contrast, exist in places where there is a strong market for technology. These places are traditionally few: Silicon Valley, London, Berlin, and a few other cities around the world. Funding at revenue stage is no longer spent on “feeding” the founder team; a big chunk of it has to go towards paying for new talent that can bring in sales.

When it comes to fundraising strategy at early revenue stages of companies, I usually advise companies to start with a clear goal that can serve as a milestone for the next financing round: revenue XX in markets Y and Z. Good examples are: one million in sales to five automotive enterprises, or 2,000 monthly recurring customers in the mid-range ad network space.

Then, after the revenue goals are set, it’s time understand the limited availability of business development opportunities, and to first drill down to operators that have verifiable experience. When looking for business development talent, the questions to be asked are:

• Which are the top 100 companies that brought similar (competing) products to the market?
• Who was on the sales/marketing teams?
• Who was on the buying side at corporate accounts?

Obviously, some people will be more senior, and are best suited to be advisors or consultants. Some will be more junior, or have a personally higher appetite for risk, and can join the team as hires. Very often the first lead to the second. One way or another, the founders need to close on this talent.

As mentioned, business development is a highly personal skill: it gets substantially better after long-term repetition, and personal network and relationships play a huge role. People generally like doing business with people they know. The larger the accounts, and the bigger the customers, the more this is true. And again, we’re still far away from the moment technology can disrupt this process (although undoubtedly, to the excitement and horror of many, one day it will).

This is why post-revenue fundraising is about strategy: setting very clear goals, and raising money to pay for the talent that can execute towards them.

At Cross Border Angels, we are committed to helping the best entrepreneurs around the world connect with the most useful angel investors. Learn more at https://crossborderangels.com/entrepreneurs.

This article first appeared on Cross Border Angels blog: 
https://blog.crossborderangels.com.