Not Every Startup Needs “Venture-Scale” Funding

Posted on Posted in Effectiveness, Leadership, The Value of Things, Weekly Value

“But then how do I stack the wood for the cold days ahead?”ARP-20140330-00100

Have you ever heard yourself saying that? OK – probably not, but how do you know if venture capital is right for you, and where do you turn if it’s not? Don’t think for a minute that every startup – every new business idea – needs venture capital. Some do. Most don’t. In fact many business ideas are not very interesting to venture capitalist investors.

 

What’s Your Story?

One client I was working with went into a meeting with a seed capital investor with a terrific idea. He told his story: “Here’s our investment thesis, our concept, the risks, a bit about our competition, what’s next and our team. Are you in?”

Answer:  “It’s not a venture-type business – a good business idea for sure but just not one that a venture investor would like.”

Why? In this case it was too hard to figure out how to divide up the “valuation pie” when both private money and venture capital was involved (which was exactly the case by the time of the meeting). It was (and still is by the way) a good business idea, but it’s too complex with too many moving parts. There wasn’t one, single obvious next step. So my client is now seeking money from elsewhere with people who want in on the ground floor of a good idea and a steadily growing business. He keeps telling his story…

By the way $5 tip number one is up there as he told his story. That’s how to generally think about your “pitch” to investors and partners.

 

Who needs ‘em?

Before you get into meetings like those, ask yourself three questions:

  1. Who do I want to invest in me?
  2. What are my options and when is each one a good fit?
  3. When should I raise outside money?

That last one is a doozy. The funding process is not really about the money. Sure money is the tool but you want the right money at the right time from the right investors. This is my second $5 tip: make no mistake – you’re looking for partners. And they’re investing in YOU (not your idea) for THEIR reasons (not yours). Keep that in mind.

Here are some things to think about:

  1. Don’t take out a bank loan to start a technology-based business. In the words of Mark Cuban, “If you’re starting a business and you take out a loan, you’re a moron.” You’re not a moron, but there are just too many uncertainties in startups. Figure out a way to test your idea without spending a ton of money and for sure without borrowing from a bank.
  2. Use your own money and investment from friends and family to get started. Don’t have those options? Then SELL! Pre-selling the idea yourself or by using one of the crowdfunding platforms such as KickStarter and Indiegogo can help in this phase.
  3. Raise money from outside after you’ve been able to show that people will buy and when there is an obvious next step. Your pitch for funding will focus on exactly what money you need and how it will be spent. An obvious next step keeps this part simple. Some example “obvious next steps” are building a prototype, scaling your platform or even adding a sales team.
  4. Typically, a venture capitalist is looking for 10x return and is trying to invest in the next $1Billion dollar company. If you don’t have that story, look elsewhere. Or at least know who you’re talking to in those meetings.
  5. There are many so-called “private placement” opportunities with wealthy individuals and investment groups. They are different from venture capitalists because they want more of a sure thing. They’re good when you have or acquire an existing business, and you want to grow an established business model.

 

Conclusion

Not every new idea needs venture capital. It depends on the investment thesis and the nature of the business model. But all businesses have access to the same amount of capital. It’s really a matter of doing your homework and getting help when you need it. Learn some of the terms you should know when you’re looking for funding.

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