Nivi · 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.
1. Focus
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.
2. Timebox
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?”
Optimism
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?
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Great stuff Nivi.
While I’m not 100% sold on the full-time plan, I do fully agree in “lessons learned” and “optimism” being key. As a founder (or member of a startup) you have to believe that what you are doing is important and that you can make it succeed. You also need to be open to the advice from other people to help you get there.
Along those lines… One thing that the other MyBlogLog founders and I tell other startups is, “If you want money, ask for advice. If you want advice, ask for money.” This can serve you well as you plan/position your meetings with VCs.
Great post, couldn’t agree more.
For me, another great, and counter-intuitive, insight from the book was the idea of how long it will take you to find a Black Swan… it’s always increasing. So if you have spent 6 weeks looking to raise money and been unsuccessful, it is more likely than not going to take 6 more weeks than it is to happen tomorrow. After the 12 weeks, if you have still not raised, it is more likely that it will take 12 more weeks to raise rather than happening the next day.
That is why the timebox strategy is so important. Every day that you do not have your raise closed means the time until it happens is probably further away.
You can also apply this same concept to sales and business development deals. The longer it takes to close a deal, the further away the close date will probably be.
And when you do find a black swan, usually there are three or four black swans swimming in the same pond. Investors avoid deals until they see someone else taking it.
I always remind myself (and others) of a single mantra regarding raising money: It only takes one.
You may have to find the one several times – based on how many rounds of funding you need… but you only need one yes.
Nivi- Perfect post man. This book is on my Christmas list and eagerly awaiting it’s arrival.
I think I’m going to grow the old fashion way w/o trying to raise money but it’s great to hear the insights of why and how it can/cannot occur.
Good post. I believe the time line you have mentioned in your post potentially makes sense for seasoned and serial entrepreneur. For first time entrepreneur the time lines seems be lot more longer.
Saying that fund raising is effectively a random process is not entirely correct. You can control the odds with a realistic assessment of your venture pitch and business plan. Show it to some friends. Do they understand the pitch? Do they “get” the business model? Are you ready to seek funding? Don’t waste silver bullets asking for intros before you are ready.
The VC’s are going to ask you or think the following (can you answer these questions :
1. How will you make money? Can you tell the investor why this is a new and innovative BUSINESS (forget about the technology)?
2. Why are you uniquely qualified to run the business?
3. Do you have experience in operations (hr:hiring/management/firing, setting up offices/server centers), experience filing patents and trademarks, bookkeeping/accounting/purchasing,
4. have you managed an out sourced operation?
5.What is your business model?
6. Have you started a company before?
You better know the VC’s if you want to get funding in this environment. Your friends who are VP’s and CEO’s will be reluctant to make intros because they are scared of their own shadows. VC partners will take meetings with guys they know. If they do not know you they will have you meet with an associate whose job is to fill up a calendar with meetings with startups. Making it past the filtering mechanism is unlikely. The game is rigged.
Tell it like it is guys. There is a low probability of finding the black swan without the right connections. And if you do you will get the meeting with the partner they will give you the usual list of objections. VC’s who will tell you that they need to see more traction (reduce their risk), want to see you find a CEO (isn’t that their job?), want to have their expert perform due diligence (so that one of their portfolio companies can steal your idea…Hewlett used to tell his engineers “you are the expert”…), they don’t understand the inflection point when there were three other startups with worse technology and biz plans just funded because the founders are big name mangers from big companies who have no clue about how to build a business and probably were forced to leave their last job.
Optimism is a double edged sword that can take you over a cliff because you will waste too much time fund raising. Being realistic and assessing whether your idea is fundable is much more important. Otherwise you will be chasing rainbows instead of black swans.
I think you’re being misguided by Taleb’s re-definition of Black Swan. A Black Swan event is something that there is no prior information for (Hume, Mill, etc…).
There is *plenty* of prior information available for obtaining investment funding.
Second, I really object to the “woo-woo” mysticism you imply that it takes to obtain investment. It’s as if you’re saying, we’re not sure what makes a successful venture, but if you try enough, you might get lucky. VC are the cosmic money slot machine. Pull the lever enough, with enough stick-to-it-ness, and funding might come.
Now not that all investors are rational, but they *do* consider relevant prior information like market prop., team, competition, economic environment, etc. – even if it is in an ad hoc rather than structured manner.
Bottom line, raising money is hard. It can even be a low probability event. But that doesn’t mean we don’t have any idea how or why or when investment happens (a true Black Swan).
Also, Bin Laden had tried to take out the WTC before. Islamic terrorists had been known to hijack planes and the fairly often blow themselves up to make a statement. We may have been surprised by 9/11, but it’s a stretch to insinuate that it was an event for which we had no prior information.
Hi Nivi,
Normally I enjoy your posts very much but I find a large weakness in the argument put forth in this post.
About a black swan you are positing from an individual frame of reference and saying that after a set of repeast observation of NOs one day an entreprenuer hears YES and that happens for reasons that he knows little of or has control over. But IMHO this has nothing to do with question of a black swan except that this highlights the random nature of the fund raising process.
A funding happening ( not an individual but to any individual) is not an improprable event as there are many past occcurences and thus funding event cant be classified as a black swan.
Black swan is not about vagaries in difference about individual sets of observation but an argument against generalization and principles of induction.
A black swan is an unanticipated outlier which cannot be known apriori.
Ofcourse the entire venture industry thrives on the finding black swans and if you argue that funding of A startup is hence a black swan then it might be more acceptable.
This post is centred around funding of a startup alone which is really means to end and the ultimate huge google like success of a startup is the real black swan which matters and more valuable even if you found the funding black swan or not.
Thus I would rather say that a google ( a huge) like success for a startup is a black swan.
Given all this the best approach is to choose option b) where you minimize your downside and maximize your upside while option a) requires you to have Warren Buffet kind of discipline which is very hard as it might consume years and decades and option c) would require you to tread like a quant trader building and tearing hypothesis models about world of business but it still leaves exposed to a lot of downside risk.
Great post, raising money is certainly a Black Swan process. Especially the first round which is a major life changing event for any startup.
In this economy, strategy 1 is the way to go: bootstrap as long as possible, stay focused on building your product, and Get Optimistic!
Love this post as I am reading it from Perth Australia where pretty much all of the Swans are Black!
A White Swan is a very rare site on our main city river, appropriately named “the Swan River”, whilst Black Swans are in abundance.
It’s one of the symbols of our State of Western Australia.
Alas the funding is not as common as the Black Swans here. When we raised money for our Web 2.0 start-up Vibe Capital 3 years ago, it was one bite from over 25 presentations to local investors that secured our full Series A funding.
Am enjoying the Venture Hacks feed very much.
I wanted to direct some extra attention to the following statement: “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).”
I have seen very few successful ventures with one founder. Someone needs to balance you out, someone needs to bust up your BS, someone needs to keep you from drinking your own Koolaid.
In addition, from my personal experience, it is also extremely important that your partner _at home_ is also supporting you like a co-investor and a co-founder. If you have that support, your energy will be spent much more efficiently and you will have less distractions.
Khosla’s talk on black swans.
http://www.eetimes.com/showArticle.jhtml;jsessionid=Q10BQ1BIXFJ4CQSNDLOSKH0CJUNN2JVN;?articleID=212001953
This model seems more suitable for modeling the VC investments rather than startups seeking funding.
Cognitive Biases, Positive Black Swan Events and Startups | Market By Numbers | San Diego | Marketing Help // Jan 3, 2010 at 9:13 am
[…] One could argue that startup founders are trying manufacture positive Black Swan Events, but if we accept Taleb’s definition, this would be a contradiction in terms. (Nivi at Venture Hacks writes about how raising money for your startup is tantamount to searching for Black Swans.) […]
Great post! Regarding some comments above, such as those of @Dubious and @Rajan – Sure, the funding process is controlled (to a certain extent), but I don’t think this actually negates the point of the post: As a entrepreneur, you’re asking the investors to take some leaps of faith. The more leaps of faith you ask them to make, the more black swan-esque your fundraising process becomes.
So if you have a proven & relatively predictable business model, aiming to a quantifiable market, that’s absolutely great – and assuming you got your facts right, you’ll probably experience less of that “black swan” effect. But not all companies have that. When you’re at a very early stage, or when building something that might be very disruptive or visionary, you might simply not be able to show an all-around fact-supported, quantifiable model. Does that mean your company suck? IMHO – of course not. Did early-stage Twitter suck?
Now, naturally as your company advances, uncertainty is gradually removed and you’re becoming more of a white swan really, and this obviously reflects on your fundraising efforts as well. (“White swan”… that almost sounds dull now, doesn’t it? 😉 )
So, my personal take on this is – Each company’s story is different. If your story requires many leaps of faith to believe in – it might mean your story is, ahmm, not so good. But it doesn’t necessarily mean so. Many of the greatest companies had such stories in their early stages. But do know what to expect when going to raise funds… And that’s, I think, what this great post is all about.