Securing Premium Value for the Middle Market – Raising Early Stage Capital

The Early Stage Capital Raise is one of the most critical determinants to economic success, yet it is the least understood by entrepreneurs.

For companies seeking an equity raise, the principal variables are: Timing, Amount of the Raise and Proof of Efficacy. Each of these variables is highly inter-related. The primary objective is to manage these issues effectively, in order to retain as much equity as possible. This is especially critical for early stage companies where risk is high, value is low and most entrepreneurs are somewhat desperate for capital. At this stage, most founders feel that raising capital is a total defocus, and the results usually demonstrate their lack of both know-how and focus.

I have witnessed too many startup entrepreneurs ineffectively manage the capital raise process, only to be left with a small fraction of ownership by the time the company is actually saleable. In this low visibility, volatile economy, the most sensitive variable impacting value is Proof of Efficacy.

Features Don’t Impress Investors

For most start-ups, the person raising the capital is usually the Founder who has engineered the idea. Most Founders are very proud of their idea/invention, and as such, they tend to focus their presentations at the feature level. However, Investors look at different issues centered around demand creation, barriers to entry and market size.

It may seem obvious that the first investor questions are “Why would a customer buy this product?” and “What is the value proposition.” It is rare that founders focus their presentation on the value of the need fulfillment. They also should offer highly credible proof supporting the monetization of the benefits.

Founders generally fail to realize that customers purchase benefits not features. An illustration of all the magnificent features of the new product or service does not lend much credence to answering the question: “Why will the customer purchase the product?”

How To Get A Short Meeting

A failure to demonstrate the compelling benefits and support for such benefits, with a high degree of credibility, will result in a very short investor meeting. Since most well-connected investors have an abundance of opportunities, vetting opportunities quickly is critical. In other words, the potential investor has a pre-disposition to the “short meeting” before the entrepreneur even walks into the room!

The Classical Mistake of Selling Features

Entrepreneur Smith has invented a chemical that cleans waste treatment filtration systems better than any other chemical. Mr Smith does his dog and pony show with a side-by-side comparison demonstrating how his chemical cleans a filter much better then the leading chemical.

He shows the size of the filter cleaning chemical market, estimates the required investment to produce various volumes of cleaning chemical and illustrates market penetration rates, all with pristine accuracy. He then determines the return on invested capital, which exceeds the investors requirements, and subsequently asks for the investment capital. Mr. Smith invariably gets turned down and invariably does not know why.

Presentation Mistake #1:

The Investor’s first question will be: “What is the benefit to the user of cleaning the filter better?” In other words, the Investor has not acknowledged that the customer will purchase the product.

Assuming that Mr. Smith gets past mistake #1, he then goes on to explain the benefits which are primarily due to the filters being cleaner for a longer period of time. Smith presents the benefits as:

  1. The system uptime is longer
  2. More water can be processed in a given period of time
  3. Less cleanings are required thereby reducing labor
  4. Less chemical is used, and so forth.

He then monetizes the benefits to show how much money the customer can save and shows that the savings are compelling. The investor still does not invest. Why not?

Presentation Mistake #2:

The investor is skeptical that the benefits will actually occur. Mr. Smith has failed to prove the efficacy of the chemical. The Failure to Provide Highly Credible Proof of Efficacy is far and away the number one shortcoming in raising early stage capital.

Proof of Efficacy is Critical

Definition – efficacy, noun. Power or capacity to produce a desired effect; effectiveness.

Proofs come in many flavors. Mr. Smith needs to show multiple proofs such as:

  1. Case studies – example: data that documents the uptime difference of filtration systems running with various chemicals.
  2. Customer Testimonials – from very well respected “arms length” users.
  3. Beta Tests – real-time use, on location at customer sites.
  4. Independent Testing – from well-qualified third party labs.
  5. Letters of Intent or Purchase Orders – actual sales are the best proof, but if the capital raise is a prerequisite to revenue, then an expression of customer intent to place orders will go a long way.


If Mr. Smith successfully demonstrates Proof of Efficacy, he has gotten further than the majority of entrepreneurs who have attempted to raise capital, and is a least half way home. Other considerations, such as barriers to entry, amount and timing of the raise, market size, etc. are relatively easy to address.