First blog in a series by Lisa Crump, founder of Cairn Ventures and Managing Partner, Sofia Fund. View Part II here. View Part III here.
As co-founder of Stratasys, Inc., a pioneering 3D printing technology company, I worked with a team of remarkable, risk-taking contributors – talented employees and managers, skilled board members and advisors, early investors, far-sighted customers, supportive vendors and a visionary co-founder. All played important roles in this start-up alchemy. After a successful IPO (NASDAQ:SSYS), with revenues about $40M and after 12 years, I exited the operation. Since then, I’ve been investing as an individual angel, and later with my partners at Sofia Fund, in companies we believe have tremendous potential based on their proprietary products that serve major market needs, and the founders and teams that will grow and guide their ideas from start-up to successful exits of their own.
My entrepreneurial experience has served me well in my afterlife as an angel. My partners and I have a collective keen sense for discovering high-potential companies, backed by a rigorous due diligence process. Together with our investors, we’ve funded dozens of businesses, focusing on women owners and leaders with technology that solves real-world problems.
Once we recognize an opportunity and make a financial commitment, we partner with the founders, providing insight along with the investment. I personally draw on my experience as a serial tech entrepreneur who has walked in their shoes to help guide their journeys so that, one day, they may also join the angel investment community when their companies scale and have positive exits. Together, we can perpetuate an ongoing cycle of bringing valuable ideas into the world that are based on merit.
This is the first in a series of blogs that encapsulate my best advice for entrepreneurs.
Smart, Realistic Fundraising
At Stratasys, I was sometimes guilty of wearing my “Entrepreneur’s Glasses.” Entrepreneurs are optimistic, passionate and confident – we have to be. But our overly rosy views can sometimes cloud the real picture. For example, we may envision an easy fund raise, and underestimate the challenges and time it requires, especially for a round of $1M or more. I advise entrepreneurs to start raising money long before they really need it.
Likewise, “Entrepreneur’s Ears” can result in hearing only what we want to hear. For example, at Stratasys, I learned the hard way not to put all your eggs in one basket and rely on one source for funding, no matter how positive the messages may sound. We let three months of precious fundraising time pass by, counting on just one resource to raise private money for our company. Eventually, we received a ‘sorry, no match’ response after thinking the due diligence was trending in our favor. As a result, we had trouble making payroll, which is one of the most painful challenges founders face. Now I advise others to continually connect with all prospective investors, keeping them updated on the company’s progress toward achieving key milestones.
As an investor, I often see companies with a business model that isn’t consistent with the amount of money they are raising. Consider the many variables: Will you grow your company from its own earnings? If so, you may only need enough funding to cover the basics of start-up to operation. Or are you trying to scale to go after a big market opportunity? How many raise rounds will it take, and at what level, to reach exit? For Stratasys, we needed significant outside capital because of the costs associated with getting a technical product manufactured and brought to market, while continuing ongoing R & D efforts for future launches. This represented two major milestones plus a continuous spend to invest in growth. I now tell entrepreneurs to model realistic underlying assumptions when constructing pro-formas, and engage your advisors and board for feedback.
Does the amount you seek pass the ‘reasonableness’ test? Does raise timing match up with the calendar of milestone markers, from ramp up to final exit? If a round’s valuation is too high, then the risk is a follow-on round will be priced at a lower value, which is called a down round. That’s not what an angel wants to see after taking more risk earlier in the life of the company.
Achieve the milestones. When entrepreneurs do what they say they will do, their life gets easier. In the early days of Stratasys, we secured funding that was tied to meeting certain key milestones. We were slow with our customer traction at the early-adopter beta sites and missed our deadline for a funding tranche. It was (another) challenging time to make payroll and a lesson for me on negative stress. Eventually, we made progress and, when we got far enough along, other funding was released.
Factor in enough buffer to get over unexpected hurdles, like unanticipated delays, whether caused by internal operational challenges or outside variables – anything from retooling or supply challenges to new tariffs or even an economic recession. Take this into consideration during the raise, as perpetual fundraising decreases the time an entrepreneur can be focused on growing the company’s value. Include both best- and worst-case scenarios when planning.
As entrepreneur turned investor, I know how difficult fundraising can be for a start-up. I have tremendous respect and appreciation for innovative, resilient risk-takers who launch and grow companies.
Continue to follow Sofia Fund for future blogs, based on my entrepreneurial experience. Soon to come: Reasonable Valuations, Conserving Cash, Tapping Resources and Achieving Exit. You can also check out insightful partner blogs on: Finding the Right Investor (Joy Lindsay) and What Makes a Company Fundable (Cathy Connett).