December 9th, 2008
Raising money is like finding a black swan.
It seems like you will forever keep hearing “no”, “let’s keep talking”, or “find a lead.” Or worse, you sign a term sheet and it blows up before you can close it.
It seems like you’ll never raise money, until one day—boom—you meet the right investor, he says yes, you negotiate a deal, and suddenly there’s money in your bank account.
What’s a black swan?
A black swan is a highly improbable, high impact, and unpredictable event. Nassim Nicholas Taleb popularized the idea in his book, The Black Swan: The Impact of the Highly Improbable.
9/11 was a black swan. It was hard to predict, it was highly improbable, and it changed the world—black swans define the future.
Once you see enough white swans, you start assuming all swans are white—until you see a black one. Once you get enough nos, you start assuming every investor will say no—until you get a yes.
The nos don’t matter.
The chances of raising money are low. You don’t know when or if it will happen, who will invest, or how much you will raise.
(The exception to this rule are the chosen ones: “obviously” fundable companies that are founded by successful entrepreneurs, companies that are making money by the truck load, or have cured cancer, or whatever.)
There will be no precedent for a yes. If someone looks at your string of nos, they won’t suggest that you’ll get a yes tomorrow—they’ll predict more nos. But just because you’re getting a lot of nos today doesn’t mean you will get a no tomorrow. The past is an indicator of the future—up until the moment you find a black swan.
If you’re looking for a black swan, ignore the nos.
Searching for black swans can be a big waste of time.
I’ve seen an entrepreneur sleep on my couch for months while he tried to raise money. It seemed like he had no hope—until he suddenly raised money from Big Firm X.
Many entrepreneurs implicitly understand this. They know that raising money is rare, unpredictable, and important to their business. So they spend months and months searching for a black swan.
But perpetual fund-raising is a bad way to raise money. Investors like to invest in working businesses—which means you need to work on the business—not spend the next 6 months raising money.
The problem with black swan processes is that they don’t always yield black swans. Sometimes they just give you white swans until you or your company dies. Black swans aren’t guaranteed—they’re the opposite of guaranteed: low probability and unpredictable.
How to find black swans.
Here are a few ways to search for black swans:
- The Chosen One Strategy: Wait until you’re obviously fundable before you raise money. Keep building value until investors come to you.
- The Hobby Strategy: Keep working on the business while you raise money as a hobby. Spend less than 25% of your time fund-raising so you can focus on activities that have a greater chance of creating value.
- The Efficient Strategy: Raise money full-time and test the market very efficiently through focus, timeboxes, and lessons learned.
The Chosen One strategy is the best if you don’t need the money right now. Instead of trying to solve the black swan problem, this strategy dissolves it. If you do need the money right now, stop and seriously think about how to build the business without the money—remember, fund-raising is low probability and unpredictable if you’re not one of the chosen ones.
The Hobby strategy is awful. Don’t even bother—just work on the business instead. Raising money is a full-time job for at least one of the founders. If possible, also get your co-founder on the job part-time, so you can pair, like detectives trying to solve a crime.
The Efficient strategy is the best way to find black swans if you can’t or won’t execute the Chosen One strategy. There are three pieces to this approach: focus, timeboxes, and lessons learned.
Raise money full-time.
Pick up the phone and get introductions to investors from middlemen. Call in every favor you have and explain why the middleman will look good by making an introduction. Get the middleman to focus on making a single great introduction. Three weak email introductions won’t do anything but one strong phone call might.
This is a lot of work just to get 10 or 15 introductions. And you haven’t even met any investors yet. That’s why we say fund-raising is a full-time job.
Put time limits on each step of the fund-raising process.
If you aren’t getting good introductions in 1-2 weeks, quit fund-raising and start executing Plan B. If you aren’t getting good meetings in 3-4 weeks, quit fund-raising and start executing Plan B. If you aren’t doing partner’s meetings in 5-6 weeks, quit fund-raising and start executing Plan B. If you aren’t signing a term sheet in 7-8 weeks—you know what to do.
And don’t start raising money until you have a Plan B—a Plan B is the simplest way to create a deadline and scarcity by fiat.
3. Lessons Learned
As you raise money, get honest, high-quality feedback from investors, advisors, etc. Once you get enough feedback and nos, stop raising money, fix your team, product, market, and traction, and try again.
It’s hard to get high-quality feedback from anyone period. Most people, even effective ones, don’t give good advice. Honest feedback from investors is particularly hard because they don’t like calling your baby ugly.
Try saying something like this when you get a no:
“Thanks. Yeah, I completely understand. We want to make this business work. What would we have to accomplish to make this business interesting to you?”
One more thing. Optimism: you can’t raise money without it. The most effective way to stay optimistic is to find the right wife for your startup (also known as a co-founder).
Fund-raising isn’t a part-time job. It’s a black swan that you should avoid entirely or chase efficiently with focus, timeboxes, and lessons learned.
What do you think?