Funding Matrix

So I have been thinking a lot about what it takes to raise money lately. It seems like there are a number of ways to create a fundable opportunity but at the most basic level there are only a few things that matter:

• Vision


• Results


• IP


• Other forms of differentiation

The vision is the business case and articulation of why the opportunity (regardless of any actual execution) is exciting. More importantly, the vision shows how big, important, or exciting a business opportunity is. For most venture capitalists and private equity professionals, this means that the opportunity has to be pretty big. I put this before results because for most entrepreneurs a vision must precede results. Ultimately, results are the most important but usually results are the natural product of some kind of vision.

Results are the tangible rewards for executing against a good vision--generally speaking these are profits / cash flow. Some companies seem to be able to generate significant results without a great vision. Other companies generate great results and have a good vision but the vision isn't big enough to appeal to private equity / venture capital investors.

IP is "economic rents." These are assets that only you have and others cannot have, by law.

Other forms of differentiation refer to other assets that only you have and that others cannot have, but this situation is not protected by law.

Most venture capital professionals evaluate deals based on the management team, market, product or service, business model, and deal terms. So is this method at odds with a method that focuses on vision, results, IP, and other forms of differentiation? I don't think so. I think that the two overlap but ultimately serve slightly different purposes. Investors will find out about the vision, results, IP and business model of the company as they look at management, market, business model, product, financial results, etc. The purpose of this other way of looking at a deal is really to highlight the trade-offs that arise when a company either is generating significant results or not and the trade-offs that arise when a company chooses to grow a startup with protectable IP, a differentiated business model or no differentiation.

So, let me channel my inner consultant here and put up a matrix that I think exposes a relationship between these ideas and the fundability of a company.

As you can see in the matrix, I think that companies with both a great vision and great results can almost always get funded quite easily. Companies with a great vision but no significant results yet (roughly 80% of all venture-backed companies) almost always need some form of differentiation to appeal to venture capitalists, or angel investors.

Companies that lack vision and results are in a tough spot. Typically, the only chance these companies have of getting funding is by having some form of protectable IP (e.g., patents). There are some investors who will invest in protectable IP with the intention of selling it to a company that will be able to create a vision and results for it -or- sometimes they have a vision of the IP themselves -or- they hire somebody to develop a vision. I would consider this a rare case though.

The takeaway is this. Results are inherently good and put companies in a great spot for fundraising. If you don't have results you better have a great vision and you better have some form of differentiation.