In my last post, I cautioned about the dangers of learning about venture capital from watching a TV show. After all, would you learn about how to remove a gallbladder from watching ER, or how to behave if you're arrested from Law and Order? No, TV isn't reality (even reality TV) and Shark Tank is plenty entertaining, but hardly a roadmap for funding.
So how do you go about raising capital? Any proper "show me the money" checklist begins with one question: What kind of money are you raising? Money comes in three basic flavors, Friends and Family, Angel Money, and Venture Capital.
Friends and Family: If you've got an idea that doesn't need much capital, and you've got friends with spare cash or a rich uncle, then you can pass the hat among your pals. Just be aware that even small amounts of money need legal documents, or you may find you've got a successful company and investors with unrealistic expectations of what their dollars entitle them to. Whether you sell shares in the company (equity) or have your investors buy convertible debt, a clear legal document is in order.
Angel Investors: The next rung on the ladder is angel capital, which has maturated into an active, and in some cases, well organized system of wealthy individuals who often work together, reviewing new companies and investing anywhere from fifty thousand dollars to a few hundred thousand. Groups like New York Angels, with whom I've worked, provide a level playing field, solid feedback, and a good mix of enthusiastic entrepreneurial investors and investment professionals. One of the nice things about angel groups is that many of the investors are themselves entrepreneurs. This means you can connect on a business level, but also as fellow travelers in the bumpy and exhilarating world of startups. Sites like Angelsoft provide a way to connect with the community and share investment opportunities.
Venture Capital: If you need a large slug of capital, then you'll be looking for institutional money invested through venture capital funds. These groups are investment professionals, often with large amounts of money in their funds. They've raised their capital from limited partners (LP's) and have shared a clear investment thesis for the companies, stage of growth, and sectors that they focus on. Young entrepreneurs often make the mistake of ignoring what companies say publicly about the size of their investments and their areas of focus. Don't waste your time here. If a firm says they do biotech and clean tech, don't try and get a meeting to pitch your consumer web business.
If you don't have a clear picture to whether you're looking for for friends, angels, or venture investors, now is the time to figure it out. A company that needs $200,000 doesn't need $5,000,000—and it's your job as an entrepreneur to have an honest vision of what you need, and how you'll put it to work. Homework here pays off.
Once you've figured out what type of money you're seeking (always question #1), here are the next four that should be on your list:
- Where does the money come from? This one is simple. Your backyard. The closer the better. Investors don't like having to fly to board meetings, and local folks have better contacts and can add value by providing more than money. So the answer is local. No two ways about it.
- What is it you're going to show investors at that first meeting? It used to be a business plan, in PowerPoint—but today, with so much of the web powered by low-cost cloud computing and storage, more and more investors expect you to bring a working demo or something that has some "traction" in order to prove you've bootstrapped a good idea. So, show everything you can that is real and sexy. Don't worry about asking folks to sign NDAs. They won't. And they shouldn't. Good ideas don't get stolen, they get funded. If you're not 150% the best person to build it, then someone else will. If you haven't done your homework and know that the angel or VC you're presenting to has a good rep, then that's your fault. When you're in front of a potential investor, you've got to wow them. That's how it works.
- How much are you asking for? Enough to get things moving. Fundraising is time-consuming and expensive. So raising a tiny bit now, and then saying you'll raise more in six months is a sure sign that you don't know the rules of the road. Raise enough to cover you for a year—or 18 months, and have financial projections that show growth, increased head-count, office space, and server costs. Getting even an amazing idea to a place where it can stand on its own two feet takes cash. Don't be shy about asking for it.
- How many meetings should you have? Chances are, more than you think. But to begin with, any possible human connection you have with a VC, angel group, or potential investor is worth exploring. Use Facebook, LinkedIn, and the firm's websites to see if you can find a "warm introduction" rather than going in cold through a web form or a junior analyst. Investors are humans—and being told by someone they trust that you're a good person is best way in the door. Someone who can vouch for you gives a potential investor a back-channel way to ask more questions, learn about your work, and get comfortable with both you and your passion for the company you want to build. If you've narrowed down the size of your raise, and the geographic area you are going to pitch—you should be able to put together a targeted list of individuals who will be excited to meet with you and hear what you're building.
Overall, the most important thing to know about fundraising is that it is a process, with a rhythm and rules. If you reach out, you can find entrepreneurs who've gone through the process and they'll often lend a hand and help you steer through the process for the first time.
Funding is a journey—but often one with a happy outcome. So just be prepared, keep building your business, and enjoy the ride.
Disclosure: David S. Rose, the CEO of Angelsoft, is on my Board of Directors—but I endorse the service because it works for both investors and startups.
[Image: Flickr user noahwesley]