By Deryck van Rensburg
Raising capital is often a critical element in the maturation of a startup regardless of whether an entrepreneur’s decision to launch a business is opportunistic or is driven by necessity due to unemployment. The number of entrepreneurs and the need for funding only continues to grow. According to the 2017 Kauffman Index of Startup Activity produced by the Ewing Marion Kauffman Foundation, about 540,000 adults became self-employed during each month in 2016 showcasing the widening gyre of entrepreneurs looking for capital.
Nearly all startups (88 percent) find the current fundraising environment challenging. This is according to Silicon Valley Bank’s 2017 Startup Outlook Survey which also found that “for the first time since 2014, fewer startups reported that raising money was ‘not challenging.’” The survey highlighted that “51 percent of startups say their most likely next source of funds is venture capital. This is despite fewer early-stage fundings by VCs in 2016. Corporate investors are increasingly viewed as an important capital source, cited by 11 percent of respondents, surpassing private equity at 8 percent.”
As competition gets tighter the need for measurable data that projects how companies compare for funding across similar businesses, in the same industry, at the same stage of development, is even more important. According to research from Pitchbook, in 2017 the number of seed deals dropped to 1,547 compared to more than 1,900 deals that closed in 2016. Roughly two-thirds of the deals were between $1 million and $5 million, while only about 5 percent were between $500,000 and $900,000—which was once the typical range for a seed deal. Seed capital is critical to starting a business and in order for a startup to survive, business owners need to know if their business is deemed investable and if not, what they need to do to strengthen their likelihood of receiving funding.
The problem is right now startups don’t have an objective way to know how their financial performance, intellectual property and investment value compares to their competitors and the industry as a whole. A company’s financial conditions are of a major interest to investors and entrepreneurs need to demonstrate how their intellectual property meets a need of the marketplace better than anyone else. Without an in-depth analysis of the strength and financial health of their company, many entrepreneurs do not know if their company is fundable prior to seeking private investment.
We are aiming to directly help entrepreneurs by addressing the lack of data-driven feedback. The Most Fundable Companies initiative, launched by the Peate Institute for Entrepreneurship at the Pepperdine Graziadio Business School in partnership with The Venture Alliance (TVA), will help thousands of startups know in detail what they need to do to improve. Our proprietary company assessment provides benchmarking across 12 dimensions which will provide unparalleled analysis to early-stage U.S. companies seeking private capital. Our scoring algorithm includes a number of variables from financial projections and market opportunity to intellectual property and the strength of the management team, all of which produce a measure of fundability. Each company-specific report includes a detailed analysis that companies can use to make themselves more attractive to investors.
By giving entrepreneurs data-driven information about how they will be viewed by investors, we aim to bridge the widening gap between early-stage US companies and the capital they need to grow. Our research is designed to help current and future entrepreneurs think about how to structure their business and pitch their service or product so that they too are seen as worthy of investment.
Our research will also assist the investment community including private equity, venture capital and angel investors in identifying startups that are capitalizing on unique market opportunities and are guided by teams positioned to become market leaders.
Startups that have been in existence for less than five years and have less than $10 million in revenue are invited to take the Most Fundable Companies survey. Over the next few months we’ll be analyzing the data to provide critical insights for both investors and entrepreneurs.
The end result of this process will be our Most Fundable Companies List, which we will release later this year. Regardless of whether or not a company ultimately makes the list participating in the process will be of great benefit. Thousands of startup companies will be given the information they need to dramatically improve their attractiveness to investors.
Deryck van Rensburg is Dean of the Pepperdine Graziadio Business School.