Are You a Zero or a One?

Startup Funding is a Binary Event

In the binary language of computers, a zero represents the “off” state and a one represents the “on” state. When I say that funding is a binary event, I mean that there are only two possible outcomes: either you succeed in raising capital or you don’t. You win or you lose – there is no second place. All or nothing. In this case we are defining a minimum capital raise to accomplish something socially significant. If you need $300,000 to open your restaurant, but want $500,000 to open your restaurant, you won’t be able to start spending the first $299,999 that you raise. You will be subject to an escrow clause so that the investors contributing the first $300,000 know they aren’t burning money in a half-built restaurant that never opens. For the sake of this discussion, you will raise $0 or $300,000; if you only raise $150,000 and a year goes by, the money will be returned to investors and you will be back at $0.

If you are an entrepreneur seeking capital to grow your business, let me explain why this simple concept should inform some important choices you need to make.

Chances are, acquiring capital is an important part of your startup and growth strategy. Many elements must be present to create a successful venture, and capital is usually one of them. If you don’t succeed at raising capital, there’s not much point in trying to build the business. It should be obvious, then, that you should do everything in your power to maximize your chances of raising the necessary funding.

This means you need to do two things:

• First, you must create a venture that an investor will want to invest in.
• Second, you must communicate the opportunity to potential investors in the most compelling manner possible.

Value Creation and Value Communication

Value Creation is about filling a real need in the market in a way that allows you to enjoy some sustainable competitive advantage. This is what entrepreneurship is all about.

Value Communication is about helping capital providers see the “Aha!” moment quickly, before they lose interest, followed by a clear and thoughtful expression of the value you’ve created. This is usually in the form of an elevator pitch, an executive summary, a pitch deck, a financial forecast, and a business plan.

Every shortcut you take in value creation and communication reduces your chances of raising the capital you need to execute your vision. Most funding sources — both investors and lenders — have a nearly endless supply of deals to choose from. They have no incentive to try to fix a flawed deal. They are looking for obvious reasons to say “no” because that moves them closer to the bottom of the haystack. And once they say no, they rarely give you a second chance.

You may think you’re being smart by cutting corners and saving a few bucks here and there. After all, until you’ve secured outside capital, you’re still funding everything out of your own pocket. Thrift is usually a good thing. But think about this: if you do things on the cheap, there’s a much greater chance that you’ll never get that outside capital. That means that everything you’ve put in up to that point — your time and money — will have been wasted. Poorly executed value communication gets you nowhere. If you raise money, it will be at a lower valuation, which means more dilution and less ownership for you, the founder.

As an entrepreneur, one of the many things you’ll need to become very good at is setting priorities. You need to assess risk vs. reward; cost vs. benefit. Some things, like legal matters or the business plan that serves as the foundation of your venture, are worth doing well. They are investments you need to make in your venture before you’ll get an outside investor to take you seriously.

If you hire an outside vendor to help you, be sure to check credentials and track records, and hire the best person you can. Fundraising is a tough game. You want to do everything you can to be the “one” and not the “zero.” If you’re going to do it, then do it well and give yourself a fighting chance. All or nothing.