McStartup

In what can only be described as completely representative of the kinds of questions I'm most often asked, our very first question has to do with raising money.  If there were 10 steps to launching a successful business, this question usually comes up about 9 steps too early, and normally I'd start questioning the asker to see if they were really prepared to go raise money.  

Money is like gasoline for a car.  It makes the whole thing go *IF* you have a working engine, a destination, a map, and a driver.  Nobody shows up at the gas station to buy gas for the car they have yet to acquire, yet time and time again I see budding entrepreneurs go looking or "gas" long before they have any sense for where they are going, how fast they need to drive, or how far away it actually is.  

That said, let me dive right into the question as it was asked, ignoring all of the above for the sake of simplicity. 

Craig writes:

What is the best source of funding for an early stage start-up needing less than $200K? Between $200 and 500K?

An excellent question, and one that just about every startup probably asks themselves at some point.  The answer is really quite simple.  Just go to your bank account and withdraw the money.

You did follow the first rule of starting a business, didn't you?  The rule that says "make sure you're born rich?"  No?  Well crap.  I didn't follow that rule either.

First, let me say that if you are trying to raise less than $500k, you are outside the range of almost all venture capitalists.  Unless you know for sure that a particular VC invests in that range, don't waste your time there.

If you are looking at less than $200k, you need to look through your Christmas card mailing list.  Yes, that's right.  The best place to get "small" amounts like that is from what I call "The Three F's": Friends, Family, and Fools.

Just because you don't have $25,000 to invest in some cockamamie kid's business does not mean that people you know don't have that kind of money stashed away.  You'd be surprised at how many people have that kind of money and are willing to invest it in people they know and trust.  

And let me make one thing clear:  If you aren't willing to make a few uncomfortable cash-seeking phone calls to the three F's, then you're in for a world of hurt when it comes to finding customers, closing deals, and generating some actual revenue.  Pick up the phone, and call.  Seriously.   You don't need to tell me that it sucks.  Believe me, I know. 

Ahem.  Ok then... 

If you need more money than the three F's will give you, then you need to look for what's called an "angel" investor.  They're called "angels" because you are generally talking about raising some money from a handful of rich people that sprinkle their magic dollars on you from above.  In exchange, you typically give up some kind of equity ownership in your currently worthless company (Yes. And really, I don't care how many hours you've toiled over the product, and how much your hourly rate would be if you were doing that for someone else.  Unless you have real customers, consider any "valuation" you get to be rather generous.)

The typical angel investor will put anywhere from $10k to $100k into a deal that they like.  Many of these people are not professional investors, and might do it for fun, as a hobby, or because they like certain industries or technologies.  If you are starting a medical device company, for example then finding a few rich doctors that work in that area might be a great place to start.

There are also more professional angels, or angel groups.  They often hold meetings, have companies come in and present, and go through the whole investigative due diligence process than an institutional investor, like a venture capitalist would.  These groups tend to be geographically based (like the Silicon Valley Angels), or based on some other unifying criteria like the Irish Angels, who are all alumni of Notre Dame.  

In any of the above cases, including the three F's, you should take the time to put together an actual investment pitch.  Why do you want the money?  What will you spend it on?  What is your business growth plan?  How will the investor get paid back?  These are the fundamental questions you need to answer.  Presenting a well thought out PowerPoint sideshow that answers these questions will impress Aunt Edna just as much as it would any professional investor.  

A lot of venture capitalists will list example business plans on their websites.  For example, you can find some here courtesy of CID Equity.  Even if you think you are small potatoes, you will benefit from acting as much like a big important company as you can.  If your pitch to Aunt Edna looks as good (or better) than the pitch the typical venture capitalist demands, then you're that much more likely to get that cash you so desperately need.

If you do raise angel financing, expect to give up anywhere from 10% to 30% of the company.  Depending on your future plans for growth, there are various ways you might consider structuring this exchange.  A lot of times, I like whats called a "convertable note" when you're talking about raising money from non-professional investors, but that topic will have to wait for a future post.

Hope this helps.  If anyone has a follow-up question, just ask.

Jeff