Rethinking the Runway: Fresh Perspectives on Startup Capital - Guest Insights From Superstruct, Rache Brand & Alex Verville
When considering the longevity of start ups, it’s frequently cited that up to 90% will fail within their first five years – and it’s often felt that more funding could have saved them.
Raising funding takes centre stage for many start up journeys. Because securing investment is seen as a golden ticket to success, with founders devoting heaps of time and effort into securing it, often to realise they need yet more capital as things evolve. It’s a cycle of raising and spending that will be familiar to many.
But what if this relentless pursuit of capital is only part of the story?
We explore the funding conundrum with guests from Superstruct Advisors, Rache Brand, CEO and Co-Founder and Alex Verville, Brand and People Connector to uncover some truths surrounding start up funding and contemplate alternative, arguably perhaps more sustainable routes to success – with or without investment.
The Biggest Funding ‘Myth’
“There’s a prevailing belief that securing capital is the sole key to success. Funding is an amazing tool, but it shouldn’t be something that actually solves the problem. It’s a myth that capital is the end of the journey.”
Rache continues, “Funding is not about being able to throw a bunch of arbitrary ideas at the wall, waste money in the process, and ultimately be in the same position the next year. Capital should actually be the catalyst for exponential growth, taking a metric that’s already proven and accelerate it’s growth.”
Gender Dynamics In Funding Outcomes
Gender dynamics play an intriguing role in start up funding, often impacting how businesses are perceived and impacting the rates of secured funding. Alex explains, “Why we’re seeing so few female funded companies, isn’t because of their idea, it’s actually because the way that they are going to run the business is typically going to be more sustainable. Rather than just burning through it, women will tend to put capital in a savings account that’s going to give, say, a five percent return right away.”
Rache agreed, “there’s a real, tangible difference in how men and women are perceived and treated when pitching business ideas. Women typically lay out exactly how they’re going to build their business during their pitches, while men will often present ambitious, more ‘pie in the sky’ often ‘unattainable’ visions. And oddly enough, this grand vision often works as an excellent sales pitch; if investors see men believing they can achieve these more lofty goals, they’re more inclined to support them.”
In contrast women’s more realistic approach might unsettle investors, “This transparency may well be why women are not getting served the term sheets. They’re not just presenting their business plan; they’re painting the real picture and sharing some of the real challenges they’re running up against which, ironically, might be too much reality for some investors. And they’re almost looking for a counterbalance of an investor coming in and say, you know what, I think I have some ideas for you on how we could bridging that gap”.
Before Jumping Into The Fundraising Process: Consider These 3 Top Strategies
Hold Out As Long As You Can
Rache advises founders to “First of all, make sure you have some level of traction. And the longer you can hold out raising capital, the better for you,”. This approach allows founders to refine their Minimum Viable Product (MVP) and conduct essential early-stage testing of the offering and market, potentially funded by grants or other non-dilutive financial resources.
Have Skin In The Game
Rache highlights the importance of personal investment in gaining investor confidence: “Investors will find comfort in seeing that you have a little skin in the game. You might consider SBA financing leverage (or similar if outside of the US), it does leverage your house, but it’ll show, if you are really committed to doing this, that you are willing to take the risk personally”.
For founders without substantial assets, Rache recommends building relationships with high net-worth individuals or forming a strong advisory board to gain both credibility and access to resources.
The Power Of Proof of Concept
Don’t just speculate prove your business model: “wait until you have some kind of product and market, demonstrate that you have achieved significant revenue is going to be a testament to the viability of your business. even if it’s not exactly where you want to go”, Rache advocates.
Once a start up has proven it’s market fit and revenue viability, you can go ahead and “building out strategically, refining your technology, and tease the market. The more you advance your front-end operations to generate sustainable revenue, the stronger your position will be for exploring additional capital.”
Deciding on Funding: When To Go External Vs. Pursue More Organic Growth?
Securing funding isn’t the only way to grow, strategies that boost organic growth can be really effective and here are two effective approaches:
Direct Engagement
Rache emphasises the importance of targeted engagement across three sales categories: active, passive, and commercial, “Pick three people in each category you either already work with or think you should work with and organically have a conversation, because the way that you get results is actually asking a question either positively or negatively to get your response on why it’s working or why it’s not working, and then figuring out a way to pivot around that.”
And don’t underestimate the effectiveness of direct interactions over passive social media activities: “From an organic sales standpoint, unfortunately, even though many of us spend a lot of our life on social media, actually the one-to-one interaction can be much more effective having conversations and meeting people ”.
As Alex has found through his approach: “It’s having the conversation directly, and also having people ready to advocate for you. Both of those are really important places to be.”
Valuable Customers Feedback & Engagement
Don’t overlook the invaluable learning and insights gained from introducing your product early through customer trials.
Particularly relevant for Consumer Packaged Goods companies, engaging retailers like Whole Foods with a free fill strategy, Rache explains; “A free fill is not a bad idea to basically say to your customer, help me to understand what it is that I can show you in order to get the sale? Because people want to help people.” This approach not only helps in fine-tuning the product based on direct consumer feedback but you also get to build a relationship with your customers by involving them in the development process.
And leveraging the inherent goodwill of people to gain product insights and improve sales, can really be as simple as going out there and saying, “Hey, I’ve got this great idea. It’s very different, at least I think it’s different, but would you be willing to try it to just tell me if you think it actually is different?”
As a founder considering a fresh round of funding, how can you best evaluate if this is the right step for your business now?
Addressing Immediate Business Pain Points
Rache recommends founders should “understand what type of assistance they’re actually seeking and what their current business trajectory looks like. Addressing immediate pain points can be quite straightforward if your goal is to build on your current trajectory,” Rache explains. “I often help founders by patching them into our network, facilitating key venture capital relationships that can drive their growth.”
By targeting these quick wins, founders can significantly boost their business’s efficiency and attractiveness to investors, strengthening their prospect of securing funding.
The Challenges of Building In Sustainability Vs. Meeting Investor Targets
“Often, you’re ‘pre-selling’ the idea to investors and once you hit a critical milestone, the pressure to keep selling up to the next round is relentless. This push to maintain an upper trajectory can prevent the pause necessary to build a sustainable operation“, Rache highlights.
“The pursuit of sustainability can be at odds with the expectations to continually ramp up for the next funding round, putting start ups in a precarious position if they haven’t met their growth targets.”
Finding the right investor fit is essential and there will be some start ups that “really struggle to raise because truly they just don’t match the profile of growth that investors are looking for.”
Caution Against Over-Reliance On Venture Capital
For this reason, Rache cautions against relying too heavily on venture capital without planning for sustainable growth: “Once you’re on the venture capital train, it’s challenging to get off. If the business needs to extend beyond the funding round, you might find yourself seeking additional funds under less favourable conditions (known as a ‘down round’),”.
This can be far from ideal, and where funding opportunities seem to be drying up, it’s a precarious place to be.
Industries With ‘Poor’ Gross Margins
For startups with less favourable margins, exploring funding alternatives outside of traditional venture capital is essential. Rache points out, “The other types of founders that I encounter find issues in their gross margin; if your COGS are too high and their margin is too low, you’re likely going to need to figure out an alternative funding strategy or business model outside of venture capital.“
Just Say No! Dealing with Investor Uncertainty
Dealing with ambiguous feedback from investors can be really frustrating, “Often times the problem is that investors don’t say ‘yes or no’; they keep you in this landscape of grey” Rache advises that, “Driving potential investors to a ‘no’ can actually a blessing”, so you take the learning and can refocus your attention on alternative, perhaps more suited options.
You’ve Secured Funding! – Now What?
So you weighed it up, decided to go all-in and you succeeded in securing funding (congratulations!) but what do you do next? Here are three key considerations from Rach and Alex to maximise your longevity after a funding round:
Revisit Strategies Post-Funding
“Typically founders will take the plan that they had gone out to funding with. Let’s say, for example, you might have taken six months to build out a plan and two months to have initial conversations with investors and it takes another two months to close and solidify those deals. Now you have the money, and you’re almost 10 months on from where you started the plan, and this is where founders will typically just execute the plan regardless of whether it is still relevant and appropriate“, Rache explains.
It can be tempting to rush ahead to enact on the original plan, but taking a pause to revisit and adapt your strategies after receiving funding is crucial because a lot can change and its’ likely that your original plans will need to be adjusted.
More founders at this point should properly re-address their market, “ do a couple of things a little slower and keep evaluating and reassessing”.
Understanding Investor Expectations
Inherently, investors are looking to make a return on their involvement in your venture. So founders need a good grasp of how investors expect their capital to be utilised to ensure it generates a return or there can be a serious mismatch in expectations.
Rache sheds more light on this dynamic: “When you take investor capital specifically, the way that the money works is that unless it’s being used in the market, it’s not making money, or that’s the impression that investors will give you. So they are really driving you to deploy and not sit on the funds in your bank account. Because in theory, the longer it sits, the less it’s working for you and the lower interest you have.
I typically like to think about it in a different way, which is actually putting it into a long term savings account. Have it start earning 5% in interest. Give yourself a pretty specific amount of money to start your exercise with explore and test the market and allow this feedback to help you to pivot is actually a much more specific way to do it.”
Smart Hiring
Each role recruited for should bring concrete value to your mission, otherwise you can overload yourselves with a huge payroll commitment that quickly erodes your funds.
“Don’t over-inflate by hiring all of the people that you assume that you’re going to need such that you reach the tipping point where a person can’t do that job anymore”, Rache advises, “Always be building the bench, but don’t start deploying funds towards new human capital until you’re very sure that you need that person and then that person is actually going to make an impact.”
“Otherwise, you just sit on a lot of bodies who will likely also be feeling a little bit concerned and might not really know what they’re supposed to be doing. So they’re also tempted to throw a lot of ideals at the wall instead of being really specific”.
Key Takeaways
There is a lot to consider so we’ve condensed Rache and Alex’s excellent insights into some key takeaways:
- Funding Myth: Securing funding is not the endpoint it’s a tool to amplify already successful aspects of your business.
- Importance of Founder Commitment: Demonstrating personal financial risk is crucial for securing investor trust; for those lacking assets, cultivating relationships with influential individuals or advisors can serve a similar purpose.
- Validation Before Scaling: Achieving and demonstrating a sustainable revenue model is vital before considering expansive growth, ensuring the business is actually ready for scaling.
- Strategic Timing for Fundraising: It’s advisable to seek external funding only after achieving tangible product traction and market validation to enhance valuation and leverage in negotiations.
- Don’t Underestimate Organic Growth: Engaging directly with potential clients and utilising customer feedback through trials are effective growth strategies can sometimes even negate the immediate need for additional funding.
- Assess Funding Needs Strategically: Before pursuing a new round of funding, founders should carefully assess whether additional capital aligns with their business’s current needs and future goals to avoid misalignment and potential growth issues.
Thank you so much to Rache and Alex for sharing their expertise in this incredibly interesting and insightful discussion.
To discover more about the brilliant work Superstruct Advisors are doing in the start up space to enable healthy, sustainable growth, connect with Rache Brand and Alex Verville.
Hi, I’m Harriet, your trusted Fractional CFO, ICAEW Chartered Accountant and Trauma-Informed Business Mentor.
My sole focus is on transforming the entrepreneurial journey into a financial success story where money feels safe, empowers your mission and amplifies your impact. I partner with purpose-led, idea-rich founders who feel frustrated by the logical world of startup finances. Together we plan for growth, secure the funding and intentionally craft the strategy and infrastructure that boosts cashflow, nurtures sustainability and fuels your creative potential. Curious? – let’s talk
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