Guest column

Failing to fundraise can be the downfall of Houston startups — here's what you need to know

The second most common reason for startup failure is running out of funds. A Texas expert has tips for avoiding that downfall. Getty Images

Startups are pulling outsized financing rounds and debt acquisitions at an unprecedented rate despite the high 80 percent failure rate of startups overall. Among the three primary reasons why startups tend to fail, running out of cash falls in the number two spot on the list at 29 percent — following no market need.

But startups need to recognize that their time and a strategic fundraising effort are tied together as critical resources to allocate properly to drive their fundraising efforts.

Despite a multitude of ideas and approaches in the pursuit of the very elusive product-market fit and monetization, the majority of startups fail to raise funds or run out of cash after initial fundraising success. For the startup to be successful, it is imperative that funds, finances, and related resources are allocated productively and precisely.

A key part of the startup CEO's job is to understand how much total cash remains on hand and whether it is enough to carry the startup towards a milestone that can lead to successful financing as well as a positive cash flow. Just as important is how to allocate their time and efforts to the fundraising process along the way.

A constant battle

For starters, valuations of a startup do not change linearly over time. Simply because it was twelve months since raising a series A round does not mean that it will be easier to raise more money or be ready for a step-up in valuation. To reach an increase in valuation, a company must achieve certain key milestones that are relevant to showing progress to market and in most investors eye's progress towards monetization.

It is important to understand what potential investors think is worthy of a step up, but generally valuation is pretty flat in between inflection points where key milestones are reached that earn a big increase.

Active vs. passive investment pursuits

Given that it often takes six to nine months and two-thirds of a CEO's time during a major round of fundraising, optimally you should align progress points into major milestones where efforts can be concentrated for fundraising success approaching the inflection points. That does not mean that the CEO can ignore fundraising in between those major milestones, but should think about waves of active and passive fundraising activities.

Active fundraising is obvious, which is the typical efforts to craft a pitch, meet with investors, nurture investor prospects into lead and following investor types. Most of the effort should be put into the early investors that will lead the round as the first checks are always the hardest.

From my experience rounds develop their own momentum when reaching about 40 percent of their target and even more when reaching 60 percent as long as the prospective investor pool is large enough. However, the CEO cannot ignore the company's progress while the raise is actively underway, as they will typically meet with prospective investors multiple times who will want to hear about progress each time.

Passive fundraising is less obvious, which happens in the gaps in between active fundraising where one round closes and before the next round starts. The primary passive activity is general investor networking, where the CEO should be out expanding their network, meeting new prospects and trying to identify the mostly likely early investors or best fit for the company.

I'm not suggesting this is really a passive activity, as it takes a lot of work. But this should be an ongoing between rounds. This passive effort gives the CEO a chance to put most of their emphasis on the progress of the company to the next milestones, but avoids a cold start to the next fundraising round.

Regardless, there are two best practices in this passive mode. First, use networking techniques to identify good prospective investors for your company and two to work on getting referrals to investors well before an actual fundraising round is open. Getting a referral is obviously to your advantage, because it takes you out of cold-calling mode that has a low success rate.

Meeting an investor while you are not fundraising takes the pressure off both the CEO and investor and gives them a chance to get to know each other personally. Again, many will not be your round leaders or champions to other investors, but this lower pressure effort gives investors a chance to listen and reach out to potential experts in their networks to validate the problem and your solution.

With the relationship established and your solution validation received, moving to an active discussion about investment comes more naturally as well as targeting of the best lead investor candidates leading to due diligence, negotiation and closing the funds.

Within a technology development firm like my firm, VIC, we have the benefit of "always-on" VIC Investor Network that we are constantly working to refresh and expand. Because of our large portfolio, seventeen companies at the time of writing this, there is a good chance that almost any life science investor can find something that suits their interest, experience, or passions.

Each member of the firm can allocate their time between active and passive efforts for the companies they are most closely involved with while still providing a wide portfolio of other companies that might be of interest to a prospective investor. Even with a portfolio of companies, the same concepts of active and passive efforts apply.

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James Y. Lancaster is the Texas branch manager for Arkansas-based VIC Technology Venture Development. Lancaster, who lives in College Station, oversees business there, in Dallas, and in Houston.

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A Rice University scientist will be working on the team for NASA's latest Mars rover. Image courtesy of NASA/JPL-Caltech

A Rice University Martian geologist has been chosen by NASA as one of the 13 scientists who will be working on a new Mars rover.

Perseverance, the rover that launched in July and is expected to land on Mars in February. It will be scouting for samples to bring back to study for ancient microbial life, and Kirsten Siebach — an assistant professor of Earth, Environmental and Planetary Sciences — will be among the researchers to work on the project. Her proposal was one of 119 submitted to NASA for funding, according to a Rice press release.

"Everybody selected to be on the team is expected to put some time into general operations as well as accomplishing their own research," she says in the release. "My co-investigators here at Rice and I will do research to understand the origin of the rocks Perseverance observes, and I will also participate in operating the rover."

It's Kirsten Siebach's second Mars rover mission to work on. Photo courtesy of Rice University

Perseverance is headed for Jezero Crater, a 28-mile-wide area that once hosted a lake and river delta where, according to scientists, microbial life may have existed over 3 billion years ago. Siebach is particularly excited hopefully find fossils existing in atmospheric carbon dioxide dissolved in water — which usually exists as limestone on Earth.

"There are huge packages of limestone all over Earth, but for some reason it's extremely rare on Mars," she says. "This particular landing site includes one of the few orbital detections of carbonate and it appears to have a couple of different units including carbonates within this lake deposit. The carbonates will be a highlight of we're looking for, but we're interested in basically all types of minerals."

Siebach is familiar with rovers — she was a member of the team for NASA's Curiosity rover, which has been exploring Mars since 2012. For this new rover, Siebach knows what to expect.

"Because there is only one rover, the whole team at NASA has to agree about what to look at, or analyze, or where to drive on any given day," Siebach says in the release. "None of the rovers' actions are unilateral decisions. But it is a privilege to be part of the discussion and to get to argue for observations of rocks that will be important to our understanding of Mars for decades."

Siebach and her team — which includes Rice data scientist Yueyang Jiang and mineralogist Gelu Costin — are planning to tap into computational and machine-learning methods to map out minerals and discover evidence for former life on Mars. They will also be using a Planetary Instrument for X-ray Lithochemistry, or PIXL, to analyze the materials.

The return mission isn't expected to return until the early 2030s, so it's a long game for the scientists. However, the samples have the potential to revolutionize what we know about life on Mars with more context than before.

"Occasionally, something hits Mars hard enough to knock a meteorite out, and it lands on Earth," she says in the release. "We have a few of those. But we've never been able to select where a sample came from and to understand its geologic context. So these samples will be revolutionary."

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