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How many companies chasing outside capital actually raise any?

To me this is one of the most fascinating questions you can ask about startup financing. The figure I have been hearing regularly over the past 25 years is that venture capitalists invest in about one in ever 500 companies that approach them for funding.  It should be added that venture capitalists rarely invest in startups. They prefer later stage companies which have proven themselves in the market place.

The success rate for startups chasing angel investors is even more difficult to dig up. My best estimate is that with credible ventures the odds could be as good as one in 200 to as low as one in 400. I admit that I’m pulling numbers out of the air here but this estimate is also based on 25 years of experience with startups.

So what’s the funny, I hear you asking impatiently.

Well, if you were to bring 500 startup founders together in a large room and survey them, every last one would be convinced that he was going to be that lucky one in 500 who gets the financial backing from angel investors or venture capitalists.  It will be rare to find anyone in such a gathering who accepts the fact that the odds are against him.

Why do I bring this point up?

Well, it’s my way of saying that this site and blog are aimed at the 499 who will have to find a way to launch without any outside money. This is not to say that they will never raise any money. They may well do so later on but just not at the beginning. They will instead have to prove themselves first by passing the standard entrepreneurial tests before investors will start taking them seriously. The most important of these tests is to be able to work with what you have and use it to create cash flow. Positive cash flow.

How this can be done is an endlessly fascinating topic.

Where there’s a will there’s a way.

The take away in this is that good entrepreneurs always have a Plan B in the event that outside investors are not found.



3 Responses to A Funny Thing About Raising Capital

  • Peter, a couple of points about your “A Funny Thing About Raising Capital” thread.
    (1) Company founders are competing for the same investment dollars. Nothing new in this. It is the same way anyone seeking a mortgage from a bank is competing to be meet the bank’s lending criteria. Banks lend based on what they deem the best quality clients — properties with the least risk and borrowers with the best chance of making repayments.

    (2) Most founders of companies seeking to raise capital to fund their new ventures have a learning process to go through about raising capital, especially if they try to do it themselves and not use advisers. So some of the 499 in 500 you talk about might be rejected now, until they become more savvy and sooner or later have credible and attractive proposals for capital raising. On this website, the education is “free” so there is no harm in that.

    (3) Statistics provide no real life meaning. For example, it is said that 80% of new businesses fail in the first 2 years. And 80% of the remaining 20% fail in the following 3 years. Does this mean people should not attempt to commence their new businesses?

    In the final analysis, this group and others on the internet are valuable to provide early stage knowledge and education. However, I do agree that people expecting to be able to raise capital by sending and receiving emails and using website will have 99.99% chance of failure. You cannot raise capital on the internet … in the same way you cannot get a mortgage by sending an email to your bank. There is a lot more to it than websites and emails.

    Your final comment about having a Plan B is sound. A good test in testing an entrepreneur is to see if he/she was able to raise seed capital from his/her immediate circle of family and friends or not. Not getting the people you know to back you first — and expecting total strangers to fall in love with your idea — does not work. The same way the bank will not accept to lend a business until the business owner signs a personal guarantee. You have to risk everything before others risk their money on you.

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