Tag Archives: funding

Funding a Venture Before Angel Investors

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This is a tough question to broach with entrepreneurs but it’s one that comes up almost daily.  From where does the money come to start??   There is a reason most entrepreneurial success is found by people in their 40s… being able to leverage a network, drawing from experience, and having the money available to start something, makes a world of difference.

Many founders start by asking how they raise the money and the reason this is always a tough question to broach is that the answer is you don’t raise money, yet.  You have to start under your own horsepower.   How?   From where does that initial capital come?

There’s really only two sources:

  1. Job
  2. Friends and family

It’s been interesting being part of the startup community for nearly 25 years; seeing how the shift of technology innovation from Silicon Valley (primarily) to other parts of the country/world, has actually been met with a rocky reception.

One of the ironic benefits of the fact that N. California is insanely expensive, is that no one presumes you can just start and people will give you money. Incubators and universities aren’t selling the idea that everyone should just be a startup founder, “it’s easy!”

No one, there, presumes bootstrapping is a good idea (some may believe that but no one just presumes it’s always the better way)… considering the time and energy it takes just to close enough customers that you might actually be able to run a startup without otherwise having income…. bootstrapping is rather considered a last resort, not the ideal.

The explosion of University Entrepreneur programs and incubators beyond California, in the last 10 years +/-, can be directly tied to a perception that people just start startups.

Everyone can do it! We just need to be taught how.

Thing is, in N. California, because of the costs of being there, essentially EVERYONE started their venture WHILE working for someone else… or later in life when they can afford to… or because they have others who float them the money.

None of this means that “Silicon Valley’s way” is better. I’m not praising that and knocking other approaches; I’m merely noting the irony of the fact that the COST of being there all but REQUIRED startups start how they should start everywhere. Yet, because elsewhere isn’t expensive, or companies don’t like the idea of employing you while you start something, or they’re encouraging 20 year old graduates to start companies… people think the money is just there, or that if you get to customers enough you’re good.

End of the day, the only answer is the same as it always has been:

  1. Work while you start your ventures OR
  2. Get the money from friends and family

Investors get involved when you’ve proven they should.  You can’t prove that from scratch.  Do the work required to build something fundable.

How Venture Capitalists Venture

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Did you know?  Venture Capitalists get paid to manage others’ money.

If someone is investing directly in your startup, and they know and love the space, having more supportive than capital based intentions, call them an Angel Investor.

If someone is directly investing in your business and they want to see customers and focus on their return, call them an investor.   A plain vanilla investor… don’t give them the courtesy of adding “Angel,” bundling them with venture capital when they behave like someone looking to diversify their retirement savings in business investments beyond the stock market, nor mincing the notion of a loan with venture funding.

A Venture Capitalist manages a Fund comprised of Limited Partners’ investment in the fund.

As such, they have understandable expectations that differ from other sources of capital:

  1. You must exit (generally). They have to deliver a return to their portfolio and they can only do that, with a private company, when they can sell their position. That happens when a private company gets acquired or goes public. You MUST exit. At some point. If you can’t or won’t, it doesn’t mean you don’t have a good business; VCs won’t invest.
  2. You must be capable of delivering a substantial return. Their portfolio absorbs losses and to overcome those losses, they bet bigger and need those bigger outcomes. You’ll hear VCs say anything between 15 and 25x. If they invest $1MM, will you exit returning them $20MM? Extrapolate that to appreciate why VC funded companies always seem big… if they invest $10MM, will you return $200MM?? Keep in mind, that means being worth MORE so you can return their portion. Obviously, this isn’t required, who knows what you’ll exit for, but CAN you? If you can’t, get an Angel or bank loan.
  3. VCs RAISE money. Yep. Mind-blowing for some. They raise it. They manage it. They allocate (invest) it. And just as you are raising money, so too must they. So while that ever import ROI is critical, there are many other things you might provide that enables them to raise money. Do you have a great vision, team, PR, or amazing product? Maybe that won’t massively exit but their investment in you is clearly wise… helping them raise more. You have to know where in the life of their fund they are; as their reaction to you is tainted by where they are in their process as a business.

VCs seem to be getting a bad rap lately for nothing more than behaving the way their supposed to.  Many are referring to themselves as venture capitalists, misleading entrepreneurs and misdirecting startups.  Be an investor, be an Angel, be a limited partner, or offer a loan; if in “Venture Capital” it’s valid to conclude that you’re responsible for investing in risky new ventures and delivering a substantial return on other people’s money.

How Some Startups are Able to Attract Venture Capital Though They’ve Just Begun

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Three things matter most to investors. THREE. You read a ton of content about validation, MVP, customers, revenue, etc. All of those perspective are platitudes; they’re meant to inspire you that you CAN or teach you how you MIGHT.

End of the day, three things matter, period:

  1. Outcome. Can this exit? Will it? No ROI for investors, no investors.
  2. Competitive Advantage. Can you develop and maintain a market? If you lose to competitors, no investors.
  3. Team. When all else fails, this can overcome the challenges in the first two cases.

So, how are startups able to attract huge amounts of venture capital investment even when they are in the beginning or a nascent stage?

They work backward.

An experienced, invested, passionate, committed, and capable team is in and of itself fundable.

These are, despite what most want to think, incredibly rare. Most founders want to retain most of the company, do it themselves, or let their ego get in the way. Most startups are tech founder heavy and have no one running marketing and business development. You might as well go home.

Working out a competitive advantage starts and ends with Marketing. Roughly .00000% of all pitches I heard have a solid understanding of their market and competitors. Most competitive analysis (analyses? analysesises?) are a joke.

If your competitors will be you, you lose. Period.

WILL you exit? Not could you. Not “we have options.”

Do you intend to, is it possible, and are you chasing that? If no, find other sources of capital.

One is critical. Two is largely dependent. And with three, we can find our way to one and two.

How the “Bootstrap Culture” of a Place like Austin Changes Entrepreneurship From an “Equity Culture” of a Place Like Silicon Valley

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Bootstrap or VC? It’s a question on so many minds as entrepreneurship flourishes beyond Silicon Valley, in cities where venture capital seems inaccessible.   It’s a question that not a day goes by in which it doesn’t come up for me, based in Austin, TX, having professional roots along Sand Hill Road.

What strikes me as most valuable for us all to appreciate is that our various cultures aren’t necessarily the causes of the way we work – the way we work is as much a result of our circumstances as it is anything.

Begging the question…

Does Austin even have this more “bootstrap culture” and Silicon Valley disruptive innovation and valuations?

Actually no.

Our perception of the startup ecosystems are of symptoms, not causes. So I suppose that actually means, yes, but…

Equity must be worth something.

That’s a distinct and definitive statement I want to make sure is clear.

Equity in a business is worthless if the business doesn’t create, sustain, and deliver value in that equity.

That’s unequivocal.

It’s not right nor wrong. You don’t have to create a business with shares in order to be successful!  But, equity is only worth something if IT is worth something.

No investor wants equity in a successful business merely cash-flowing.

Now, that said, obviously there are other capital sources, independent from equity, that derive value from a business – debt, profit-sharing, etc.

But the question we’re pondering asks about equity and explores valuations so we have to be explicit first that equity is ONLY worth something when the equity itself is worth something.

Can a business be profitable and successful but have equity NOT worth much??

Absolutely!

Service based businesses (agencies) are a great example of that. Their value to investors is, roughly, pinpointed at ONLY 2x revenues.

Contrast that with your typical Venture Capital funded business wherein valuations tick up over 10x revenue.

How is one business WORTH so much more than the other? Isn’t customers and revenue all that matter??

Absolutely not.

And herein we’re getting to the root of WHY it seems Silicon Valley has more of a focus on equity based ventures and investment while Austin favors bootstrapping.

Not because people want that but because they are resigned to the approach that’s available to them given the circumstances of the region.

Equity must be worth something.

  • Equity in a business that will likely fail, even if funded, isn’t worth anything
  • The equity in a business that can’t capably compete in the market, is likely depressed from what it could be
  • The equity in a business lacking access to resources (experienced people, partners, and more capital) is worth less than the like business that is flush with those resources
  • The equity in businesses where people tend to exit prematurely, or for less than is possibly attainable, is simply worth less than where business strive for more

I can go on but hopefully you’re seeing a picture of the WAY business is done, generally speaking, impacts an outcome for all the businesses therein.   Sales and revenue are a critical consideration and an invaluable resource among many; but sales and revenues are considerations among many.

As a key example of the distinctions I’ve experienced first hand, in both markets:

  • Austin favors Sales. Sales accelerators are prolific. Advisors encourage customer adoption. Rather than bluntly saying, “no,” many investors mis-guidedly encourage struggling entrepreneurs by saying things like, “come back when you have more customers.”

I rarely heard such things in Silicon Valley. Now, granted, this is a self full-fulling cycle… Austin focuses on customers and revenue, that makes investors less *necessary* (seemingly) yet when founders seek (and need) capital and those very investors, then necessary, say, “more customers,” founders believe that and keep “bootstrapping.”

Out of necessity.

KEEP BOOTSTRAPPING.  Because let’s get one thing clear – every startup, every founder, starts out bootstrapping.

And then you hear the encouragement in the community that it’s “better that way!” As though bootstrapping or funding is inherently better….

Better is succeeding; not drinking the cool-aid of a methodology.

  • Silicon Valley is Marketing focused. Startups, there, focus on market share and competitive advantage. They focus on disruptive innovation and building capable teams that will find success.   Capital is a competitive advantage.   Funding, not without its costs, is a competitive advantage.  You see the impact of this in the litany of ventures there that didn’t have customers for years! Building value in equity, market share, resulting in business of great value… with incredulously little revenue.

Not better. Different.

Economists in the 80s and 90s (pre-internet) were noting that Marketing creates the most value in business but when the internet came along and broke (*changed*) how marketing works, only Silicon Valley (really) made that transition, as the Marketers were embedded in the very evolution of our economy. Elsewhere, Marketers continued to practice traditional marketing, while internet-savvy marketers built companies that changed the world.

And you see the legacy of that. Outside of Silicon Valley, Marketers are generally now considered glorified Lead Gen hires, brought in only after the founders have a product they want to sell.

Equity must be worth something.

A sold product in a service business… a competitive company, with valued equity, is a market driven business.

Equity must be worth something.

When it’s not, investors don’t participate. Period.

When investors aren’t interested or available, founders bootstrap. And when founders bootstrap, out of necessity, they perpetuate a culture that bootstrapping is *better* because humans commiserate with one another so as to feel good about their circumstances.

In as much as I was asked, how does the “Bootstrap Culture” of a place like Austin change entrepreneurship from an “Equity Culture” of a place like Silicon Valley?   It guides us as an ecosystem as to what we might address so as to overcome the challenges that hinder innovation and enable entrepreneurs who should be funded to find it, locally.

Let’s Get Something Straight, ALL Entrepreneurs are Bootstrapping

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Do Venture Backed Entrepreneurs look down upon Bootstrapped Entrepreneurs? 

Asked of me, on Quora, and I thought, WTF?!

Let’s get something clear because such distinctions are misleading, inaccurate, and aggravating.

ALL entrepreneurs are bootstrapped entrepreneurs.

Every single one.

The only people who start out with funding are privileged and more rare than Unicorns. They aren’t remotely in the same boat as the 99% of us who invest our wealth, reputation, time,and health in starting new ventures.

Some types of new businesses, and some make ups to teams, are suited to investment.

Some are not.

It is neither better nor worse, in any way, to make it without VC nor capably close funding.

All sources of capital have a cost. That includes the cost of having customers who pay the way for a venture that continues to go without funding.

Look down on bootstrapped entrepreneurs??!  Applaud those who should be and capably are. I feel bad for those who shouldn’t be but are struggling to achieve otherwise.  Celebrate everyone supporting those doing their best to help every entrepreneur find their way (and, frankly, I get aggravated at those who encourage that they ‘know best,’ causing so many to waste time and energy on bad advice).

Capital is a resource, and that resource is not without cost, no matter how it’s acquired. A question of Bootstrap or VC being better only has merit in circles where people are misleading others that one way is in fact so; such circles need to be called out for the harm they cause.

Keep at it since we’re all bootstrapping until we find the degree of success that establishes that we no longer need be doing so.

 

On the Challenges Facing an Angel Investor

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Angel investment is a distinct *source* of capital that it’s important to distinguish from “seed money,” funding from angel groups, venture capital, money from an incubator, or even an early investment from someone with later stage expectations.

In my time in Silicon Valley, with New York, and in Texas, what is glaringly obvious is that the lack of distinction of Angel Investor is cause for misalignment, inefficiency, and founder headaches as they endeavor unsuccessfully to raise that early capital.

They’re called Angels for a reason and let’s be clear, that title, and those wings, don’t just define someone who funds your early startup – an “Angel” is on your shoulder, helping out, making a sacrifice of their own out of love for you and what you’re doing, and in the process of much more than funding, they give your startup wings.

And prompting my sharing these thoughts is that not a day goes by where I don’t meet a founder who thinks they are fundable by Angel Investors (and they’re not) OR someone referred to (or referring to themselves) as an Angel Investor is really just a business investor… not really knowing your space, and expecting revenue and customers at your earliest stage.  I was just pinged with this question: What problems/struggles do angel investors commonly face? 

In the interest of that consideration, rather than focusing on the challenges of the startup founder raising seed money, let’s talk about the challenges Angel Investors face; what makes it harder for them to do their job of supporting the highest risk stage of innovation and entrepreneurship?? 

Three Key Challenges that Hinder Angel Investors

  1. Mis-perception
  2. Patience
  3. Bad advice

Mis-perception

Angel Investors are not VCs. Angel Investors are not business investors. Angel Investors are not Angel Groups nor crowdfunding.

If you are seeking, talking with, or getting indeed by an Angel, they have an incredible amount of disposable wealth, experience in your industry, and a portfolio of startup investments.   Writing a check to a startup does not directly an Angel Investor make.

Mis-perception of the word “Angel” drives bad advice and poor connections.

The misalignment between your stage and needs, and investor expectations, is critical. They’re distinctly called “Angel” for a reason and that reason isn’t just that they invest as you start up.

Patience

Investing at a seed stage (when Angel Investors invest) means an average 7–10 year term until a return on investment.

Many can’t or won’t wait that long.

7–10 years. Average (not, at most).

Bad advice

Startup communities are fraught with people offering “startup” advice so as to pad their resume, feel like they’re contributing, sell their services, and more.   Watch for this, my point isn’t a harsh judgement of anyone doing it; it’s that you need to be conscientious of the experience, goals, and perspective of the advice you’re getting.

Startups are not your average new business.  Entrepreneurs and founders develop NEW markets and innovations.

Much of what new *businesses* might spend their time on, startups should not, as an existing business type/model certainly can learn from the advice and experience of other like-businesses.  Startups, breaking conventions, serve “Angel Investors” for a reason – they’re doing something new and uncertain; typical new business advice may not apply, and can certainly mislead.

—

As you venture forth seeking Angel Investment, be clear about what that really means, how to discern Angel Investors from other sources of capital, with their different experiences and expectations, and work to make it easy to meet Angels on their terms, so they can best meet and support yours.

Getting to Know Your Venture Capitalist

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There are two types of people in the world. Those who know what they’re doing and those who don’t.

Your challenge, as an entrepreneur raising capital, is to discern the difference.

Even with the very best of intentions, wealth doesn’t necessarily = experience, good advice, and sound decisions. In venture capital this fact can lead to disastrous outcomes.

Everyone working to support entrepreneurship is invaluable to what we’re doing! But don’t presume everyone knows what they’re doing despite their title, means, or peers.   This is particularly important in raising capital.

We’re here to explore the Venture Capitalist in particular, so having considered the differences between Angels, investors, and VCs, let’s talk about getting to the know the venture capitalists in the firm you’ve started to get to know.

In a firm, discern these people:

  • The person from wealth
  • The person with a financial background
  • The person with an exceptional peer network
  • The person who exited a startup, maybe two
  • The person with years of experience working with startups
  • The person who still works with startups
  • The person whose reputation is on the line

Every firm has an amalgam of these people in some form or fashion. Some only wear one of those hats while others might meet various points.

As should be the case, frankly, the person with the greatest at stake, determine by capital, should have the most influence.  Put simply, the one with the money has every right to be heavy-handed in what that money does.

But that’s on one hand. On the other hand, they may not be the ideal person making those decisions; and often and unfortunately in Venture Capital, the people who can make better decisions aren’t there.

Though their heart and checkbook is in the right place, your contact may not personally really have any grasp of what you’re doing.

And there’s the rub: you have to discern these differences without confirmation bias, over confidence, and ego. What you discern may very likely be wrong, despite your certainty of what you think you know about your business.

A thought…

Considering that someone like the wealthy oil industry GP, King of Upper Entropia, or successful commercial property developer likely has a seat at the table in a VC firm, appreciate that there is a stupidly long list of people with more experience and know how about developing startups to be successful, than those with the wealth to be “VCs.”

Yes. Experience and knowing how to turn new ventures into success doesn’t necessarily mean said people have gotten wealthy enough to become VCs. Seems like an oxymoron, I know. Certainly someone with experience and a track record of creating successful Startups has gotten wealthy!! Isn’t that the goal??

Life happens, some people don’t want to be founders but know how to make them successful, some people get divorced and lose nearly everything, some people have merely worked in jobs with startups… point being, there is a stupidly long list of people who more effectively can (and do) create returns in startups, than investors.

What’s the signal to look for?

Do VCs turn to such people? Is their network of to whom they turn a reflection of what you’re doing and need or is it a reflection of their friends and usual suspects? Are they making decisions in a vacuum be that only within partners, only within our firm, only within town, etc.? Are they turning to who knows YOUR space, gaps, and opportunities or are they making decisions in a bubble?

This is, I’ve experienced, what’s at the heart of what distinguishes between a VC, an Angel, and a business investor.

That is to say that VC is part of that firm of diverse experiences and perspectives, managing other people’s money and accountable for delivering returns. Is it not in their best interest to recognize their shortcomings and turn to others based on your circumstances?

Of course it is.

Someone wealthy and experienced with a startup or an industry by way of work, making their own decisions, is what you’d call an Angel Investor. They indeed may only turn to partners or the local community, but they have some relevant experience such that the can effectively make their own silo’d decisions.

Someone wealthy and desirous of supporting entrepreneurs and investing in startups, but doing so themselves despite experience, is a business investor. And they’re a wonderful resource for you but know the difference!

Discern the difference as, frankly, they don’t necessarily see the differences amongst themselves (or want to concede them to you).