Finance: Fundraising and Capital Sources
Today’s lesson is the one many wait for, thinking that it’s the most important role of a startup: fundraising.
The focal point of this lesson will be investor funding, but I want to first highlight several other methods to fund operations. Chances are, you will have to do one of these at some point in your startup journey, even if you do raise funding.
1. Pre-sales. This might mean launching a Kickstarter project, or it could mean getting some of your early, most positive customer development interviewees to commit early.
2. Savings. This can be painful, but everyone has to do it for some period of time.
3. Consulting. You likely have specific expertise in your industry that others might value, and it can be a great way to monetize your customer development.
4. Grants. This is easier in more science-rich fields or when you’re in school.
5. Loans. I don’t recommend this, but it’s an option.
6. Weird fundraisings. Examples include Obama O’s and Cap’n McCain’s being sold by Airbnb and karaoke being done by Fetchnotes. I can’t say these kinds of things are super lucrative, but they make for great stories.
And then finally, there is investor funding. This can be broken into:
• Friends and family. Friends and family will invest because they believe in you, and they can be easier to get to early on. However, they can often make for the most disastrous situations because you can ruin a personal relationship in addition to a business one if things sour.
• Accelerators and incubators. These are super-early-stage investors who give you a small amount of money ($10,000-25,000) for a larger amount of equity (5-10%) but include a space to work, access to investors and mentors, and overall help you build your business in a very hands-on manner.
• Angel investors. Angels are high-net worth individuals, often retired or veteran entrepreneurs themselves, who invest in new businesses. The stage varies, but usually they come in at the pre-seed or seed stage, when you’ve demonstrated some amount of product-market-fit through early traction but haven’t yet blown up.
• Venture capitalists. Venture capitalists are professional investors, who manage other people’s money with the goal of investing in break-out companies that can generate ten-times the returns on their capital. Some venture capitalists act like “institutional angels” and enter at seed stage, whereas others only invest after product-market-fit has been firmly established with serious sales.
Every investor you bring on is someone you will have to talk to regularly, answering what can, at times, be asinine questions, and of whom you’ll need the signature for major company decisions like financings or acquisitions. That’s particularly relevant when your interests diverge and a life-changing outcome for you doesn’t move the needle for them. Do not take this lightly, and remember to do your diligence by talking to their portfolio companies.
Assorted Advice on Closing the Deal
The above should give you a good framework for thinking about capitalizing your business, but tactically, I do have some advice:
1. Don’t cold-email investors for funding—cold-email people who can connect you to investors, and build relationships with them for other reasons (feedback, advice, etc).
2. Just as you must inspire employees to join your cause, so must you inspire investors. Don’t neglect this and turn it into a financial decision—investing in a startup is almost always a bad decision when looked at purely through an economic lens.
3. Plan to spend all your time on fundraising and investor drama for at least three months once you start.
4. Always set the follow-up after a meeting. Investors are notoriously fickle, and you will need to chase them down and be more persistent than you’ve ever had to be.
5. Don’t be afraid to hop on a plane or bus to meet someone in person if you can afford it.
6. Meet in neutral locations with food for the first meeting. Well-fed investors are happy investors, and they’ll usually pay. :)
Of course, the best way to have a successful fundraise is to have a product, metrics, and team that speak for itself.
Tomorrow, we’ll wrap up with some final thoughts on launching the startup.
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