An Amazing Discovery in Raising Capital

Raising Venture & Angel Capital and Distance

One of the amusing (and sometimes exasperating) things that you notice as you get older is that people keep "discovering" the same obvious points year after year, and when they do they act like Christopher Columbus spotting land in the West Indies in 1492.

Last year, a research team at the University of Maryland B-School discovered that venture capitalists don't really read business plans. If they do look at them at all, it's to read the executive summary and management team section to see if any credible people are part of it. If they are still interested, they will then initiate a series of meetings that take place over months in most cases before making a decision. So the lesson here is don't put too much faith or money into your business plan. Smart investors know that they are as objective and accurate as a personal ad on a dating site. I first learned that hardly anyone actually reads business plans back in the late 1980s.

Now another academic has made yet another discovery which will send shock waves through the startup world. Are you sitting down? Here is it: investors don't like putting their money into companies that are more than an easy car commute away. In many cases, this means that any opportunity outside of a 25 mile radius gets rejected. In cases where an investment is made outside this radius, it's usually of a smaller size according to the study.

“We saw that visiting a company day to day made a real difference, and investors were willing to write bigger checks if they could do that,” he says. From Tian’s research, venture firms don’t necessarily abide by the so-called 20 minute rule, where venture capital firms typically want to invest in startups located within a 20 minute drive of their office, but a greater distance does make a VC hold on tighter to its purse strings. (source)

If the reasons why aren't obvious, allow me to spell them out for you. Investors, both VCs and angels, like to meet face-to-face on a regular basis with the people running their startups because their money is at risk. If an angel investor cuts a check for a new telehone system, he likes to be able to drop by and see that the money was spent on exactly that and not on a vacation for the CEO. Moreover, startups stumble and falter all the time. It's an accepted part of the game. When it happens investors want to be able to meet with the mangement team face-to-face to work out a solution. Sometimes people have to fired or hired and the investor wants a say in the matter. That's all hard to do if the company requires a plane ride to visit.

The lesson here is that if you are seeking capital you need to be near the people with money in the vast majority of cases. If you're not near them, consider moving. If you're not willing to move for the sake of your business then you may not be as committed to its success as investors would like see.Investors will simply assume that real agenda is to create a nice comfy life-style business for yourself with their money.

The worst thing anyone can do is hope that investors from another country will wire them money.

So yes, geography is a major factor in your ability to raise money from investors.

 

 

 

Comments

[Hugh Elliot]

That is even tighter than the "Drop In Rule" which I have taught to more than one of my clients whoich is intending to start up a new facility or to expand by acquiring another business.

The Drop In Rule says that the enterprise must be close enough so that you can decide, at 9:00 a.m., that you want to "drop in", be able to get there, spend a decent amount of time and get home in time for dinner.

[Alan Munroe]

The older investors have clones. This changes the long distance theory. So I find...
The clone moves to the city where the business is located.