Over the past few years, I have helped raise nearly $๐๐ ๐บ๐ถ๐น๐น๐ถ๐ผ๐ป ๐ฑ๐ผ๐น๐น๐ฎ๐ฟ๐ for Shoutlet. So itโs no surprise that several new entrepreneurs ask me about obtaining Venture Capital funding. Iโve learned some very valuable lessons throughout the process, and Iโm hoping that this post will help you examine all of your available options before you consider funding.
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๐ ๐๐ถ๐ฟ๐๐, ๐ผ๐ป๐น๐ ๐๐ฎ๐ธ๐ฒ ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด ๐ถ๐ณ ๐๐ผ๐ ๐ป๐ฒ๐ฒ๐ฑ ๐ถ๐. It sounds like an obvious statement, but too many startups go out for funding just because they think they have to. I suggest doing whatever you can to self-fund your startup before accepting funding.
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๐ ๐ฆ๐ฒ๐ฐ๐ผ๐ป๐ฑ, ๐๐ต๐ฒ ๐ฑ๐ฎ๐๐ ๐ผ๐ณ ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด ๐ฎ๐ป โ๐ถ๐ฑ๐ฒ๐ฎโ ๐ฎ๐ฟ๐ฒ ๐ผ๐๐ฒ๐ฟ. Naive startups believe that you can simply devise a good idea, get it funded, quit your day job, and then start taking a salary. Those types of funding events have not happened since the Clinton era. No investor funds an โideaโ anymore. Venture Capitalists look for proven business models now. They only want to invest in a โsure thing.โ My suggestion is to borrow and beg to get your idea to a prototype, sell some of it into the marketplace, then go for funding once you prove that it can scale.
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A famous CEO told me once, โ๐ง๐ต๐ฒ ๐๐ฒ๐ฐ๐ผ๐ป๐ฑ ๐๐ผ๐ ๐๐ฎ๐ธ๐ฒ ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด, ๐๐ผ๐ ๐ฐ๐ฎ๐ป ๐ป๐ฒ๐๐ฒ๐ฟ ๐ด๐ผ ๐ฏ๐ฎ๐ฐ๐ธ. Your business will be about growing top-line revenue, and youโll soon need more funding to sustain your growth.โ He was right. Once you accept funding, you work for your Board of Directors and shareholders, and you must do whatโs best for the company, with or without you there. I suggest examining all other options before going for funding.
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๐ Consider this story from my friend and fellow entrepreneur, ๐๐ฎ๐ฐ๐ธ ๐ฃ๐ต๐ฎ๐ป. Heโs an entrepreneur that did it both with and without funding. Iโve asked Jack to share his story:
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โIn 1997, I was involved with an early Internet startup in Portland, Ore during the dot-com boom of the 90s called Handyman Online. By 1998, our technology for online lead generation, matching and lead distribution systems proved so successful that we were growing beyond our capacity and had to expand offices and take on more overhead. ๐๐ ๐๐๐๐, ๐๐ฒ ๐ต๐ฎ๐ฑ ๐ฟ๐ฎ๐ถ๐๐ฒ๐ฑ ๐ป๐ฒ๐ฎ๐ฟ๐น๐ $๐๐ ๐บ๐ถ๐น๐น๐ถ๐ผ๐ป ๐ฑ๐ผ๐น๐น๐ฎ๐ฟ๐ ๐ถ๐ป ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด, hired a new CEO, opened nearly 30 physical offices nationwide and grew our headcount to 300+ employees. We spent several million dollars to hire a consulting firm to do an overhaul of our technology infrastructure, complete hardware upgrade and bring in enterprise level software to support a large business.
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By 2000, we had given up control, ๐ฏ๐๐ฟ๐ป๐ถ๐ป๐ด ๐๐ต๐ฟ๐ผ๐๐ด๐ต ๐ฐ๐ฎ๐๐ต ๐ฎ๐ ๐ฎ ๐ณ๐ฎ๐๐๐ฒ๐ฟ ๐ฟ๐ฎ๐๐ฒ ๐๐ต๐ฎ๐ป ๐๐ฒ ๐ฐ๐ผ๐๐น๐ฑ ๐ด๐ฟ๐ผ๐ ๐ฟ๐ฒ๐๐ฒ๐ป๐๐ฒ๐, and by spring of 2001, during the dot-com meltdown, we needed the next round of funding but our investors had all fled. The more money we raised, it appeared the more money we would need to keep growing and chase profitability. Eventually, we sold our assets to our biggest competitor and walked away with nothing.
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However, it didnโt take long before we were back at it. ๐๐ ๐ฆ๐ฒ๐ฝ๐๐ฒ๐บ๐ฏ๐ฒ๐ฟ ๐ผ๐ณ ๐๐๐๐, ๐๐ฒ ๐ต๐ฎ๐ฑ ๐๐๐ฎ๐ฟ๐๐ฒ๐ฑ ๐ฎ ๐ป๐ฒ๐ ๐ฐ๐ผ๐บ๐ฝ๐ฎ๐ป๐ ๐ฐ๐ฎ๐น๐น๐ฒ๐ฑ ๐ฅ๐ฒ๐น๐ถ๐ฎ๐ฏ๐น๐ฒ๐ฅ๐ฒ๐บ๐ผ๐ฑ๐ฒ๐น๐ฒ๐ฟ.๐ฐ๐ผ๐บ ๐ฎ๐ป๐ฑ ๐๐ผ๐๐ฒ๐ฑ ๐๐ผ ๐ด๐ฟ๐ผ๐ ๐๐ต๐ถ๐ ๐ฐ๐ผ๐บ๐ฝ๐ฎ๐ป๐ ๐๐ถ๐๐ต ๐ผ๐๐ฟ ๐ผ๐๐ป ๐ฟ๐ฒ๐๐ผ๐๐ฟ๐ฐ๐ฒ๐ and not give up our equity if we didnโt have to. The goal was simple ๐ฏ; grow with our own resources, build a solid team, wear as many hats as we could manage and try to double our revenues each year while maintaining control of our company.
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By 2007, we landed #๐๐๐ ๐ผ๐ป ๐๐ป๐ฐ. ๐๐๐โ๐ ๐๐ฎ๐๐๐ฒ๐๐ ๐๐ฟ๐ผ๐๐ถ๐ป๐ด ๐ฃ๐ฟ๐ถ๐๐ฎ๐๐ฒ ๐๐ผ๐บ๐ฝ๐ฎ๐ป๐ถ๐ฒ๐ by achieving more than ๐๐๐๐% ๐ด๐ฟ๐ผ๐๐๐ต. The offers started to come in and by February of 2008, we successfully sold our business to a Bay Area company in the lead generation space for all cash. Our patience, hard work and dedication finally paid off. We probably could have grown faster had we taken on investor money like the first business but we would have given up control, equity and would have had to sell our business for at least 10 times what we sold it for just to achieve the same personal financial exit.
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๐ ๐ ๐ฎ๐ฑ๐๐ถ๐ฐ๐ฒ ๐ถ๐ ๐ต๐ฎ๐๐ฒ ๐ฎ ๐ด๐ผ๐ผ๐ฑ ๐ฏ๐๐๐ถ๐ป๐ฒ๐๐ ๐บ๐ผ๐ฑ๐ฒ๐น ๐ณ๐ถ๐ฟ๐๐, ๐๐ฎ๐ธ๐ฒ ๐บ๐ผ๐ป๐ฒ๐ ๐ผ๐ป๐น๐ ๐ถ๐ณ ๐๐ผ๐ ๐ต๐ฎ๐๐ฒ ๐๐ผ, ๐ฑ๐ผ ๐๐ผ๐๐ฟ ๐ท๐ผ๐ฏ ๐ฎ๐ ๐ฎ๐ป ๐ฒ๐ป๐๐ฟ๐ฒ๐ฝ๐ฟ๐ฒ๐ป๐ฒ๐๐ฟ ๐๐ผ ๐ฎ๐ฑ๐ฑ ๐๐ฎ๐น๐๐ฒ, ๐๐ผ๐ฟ๐ธ ๐๐ผ๐๐ฟ ๐ฏ๐๐๐ ๐ผ๐ณ๐ณ, ๐ฎ๐ป๐ฑ ๐ฏ๐๐ถ๐น๐ฑ ๐ฎ ๐ฏ๐๐๐ถ๐ป๐ฒ๐๐ ๐๐ต๐ฎ๐ ๐ฐ๐ฎ๐ป ๐ฏ๐ฒ ๐๐ฒ๐น๐ณ ๐๐๐๐๐ฎ๐ถ๐ป๐ถ๐ป๐ด ๐ณ๐ผ๐ฟ ๐ฎ ๐น๐ผ๐ป๐ด ๐๐ถ๐บ๐ฒ. In the end, your hard work and dedication will pay off.โ
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โ Jack Phan
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๐ก ๐๐๐ป๐ฑ๐ถ๐ป๐ด ๐ฆ๐ผ๐๐ฟ๐ฐ๐ฒ๐ (๐น๐ถ๐๐๐ถ๐ป๐ด ๐ฏ๐ ๐ฟ๐ฒ๐ฐ๐ผ๐บ๐บ๐ฒ๐ป๐ฑ๐ฒ๐ฑ ๐ผ๐ฟ๐ฑ๐ฒ๐ฟ ๐ผ๐ณ ๐ฝ๐ฟ๐ถ๐ผ๐ฟ๐ถ๐๐):
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1๏ธโฃ ๐ฃ๐ฟ๐ฒ-๐๐ฒ๐น๐น โย If your idea is solid enough, why not try pre-selling it to customers? When I first began Shoutlet, I sold the idea of our platform to clients by showing them a PowerPoint presentation well before it was actually built. I promised prospects a substantial discount and the opportunity to help shape my product roadmap if they ordered in advance. I funded the entire first version of Shoutlet by taking pre-orders.
2๏ธโฃ ๐๐ฟ๐ถ๐ฒ๐ป๐ฑ๐ ๐ฎ๐ป๐ฑ ๐๐ฎ๐บ๐ถ๐น๐ โ Your own friends and family can be an excellent funding source. It may surprise you how supportive they can be when you approach them for investment. Most families have a โrich uncleโ that is more than willing to help. If you get funding from family, I would make the process formal. Set a valuation and determine your terms of investment before you take their money. Iโve seen verbal deals lead to lawsuits later, which can be ugly for families. Also, be clear about the risks involved in funding a startup.
3๏ธโฃ ๐๐ฎ๐ป๐ธ ๐๐ผ๐ฎ๐ป โ After last yearโs financial crisis, getting money from bank institutions is much more complex than it used to be. Iโd recommend a bank loan if you truly have faith that your product or service will sell immediately AND if you have collateral to offer the bank (such as your home, car, or 401k account). My advice is to never put yourself in a situation where you canโt unwind. Always make sure that you can pay off the loan even without selling your product or service.
4๏ธโฃ ๐๐ป๐ด๐ฒ๐น ๐๐๐ป๐ฑ๐ถ๐ป๐ด โ You can often obtain funding from high-net-worth individuals in your hometown. These people can often be found by networking with lawyers, bankers, and accountants. Be sure that the individual is anย accredited investor. You need to follow specific rules to stay out of legal trouble when going the Angel route. Often Angels invest in the individual, not necessarily the company. Itโs much easier to get Angel investors than it is to go out for Venture Capital funding.
5๏ธโฃ ๐ฉ๐ฒ๐ป๐๐๐ฟ๐ฒ ๐๐ฎ๐ฝ๐ถ๐๐ฎ๐น โ Venture Capital money is the toughest to get. The folks that run these firms are often Harvard, or Stanford educated with several years of experience in funding and selling companies. They receive hundreds of monthly business plans and only jump on the ones that align with their firmโs investment criteria. To obtain Venture Capital, you often have to be already generating revenue with a proven business model. Venture Capitalist invest in the company, not the individual. They want to see how you can scale your company and give them a ten times multiple on their investment. To pitch a Venture Firm, I recommend having two pieces to your pitch: 1) A PowerPoint presentation that can tell your story in less than 10 slides and 2) An Excel sheet that proves your revenue model. Note: VCs think in bullet points. Be clear, concise, and to the point. You can visit the National Venture Capital Association for information on Venture Capital. Also, it may be helpful to download aย Term Sheetย to see in advance what your investment terms might look like. In addition, be sure to check outย The Fundedย to see how well other entrepreneurs rate your potential Venture Capital investors.
6๏ธโฃ ๐๐ฟ๐ผ๐๐ฑ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด โย Kickstarterย gained significant attention as a way to get funding for your new product or service through the internet. Crowdfunding allows inventors to list their idea on a popular website to raise funds before it goes to market. Often several hundred (or thousand) people will invest in or pre-order your product before you build it. Iโve found this process to be very effective for products (not as good for services) that you want to test the market before you go bigger.
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๐ ๐ง๐๐ฝ๐ฒ๐ ๐ผ๐ณ ๐๐ป๐๐ฒ๐๐๐บ๐ฒ๐ป๐ ๐๐ป๐๐๐ฟ๐๐บ๐ฒ๐ป๐๐ (๐๐ฒ๐ณ๐ถ๐ป๐ถ๐๐ถ๐ผ๐ป๐ ๐ณ๐ฟ๐ผ๐บ ๐ช๐ถ๐ธ๐ถ๐ฝ๐ฒ๐ฑ๐ถ๐ฎ):
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๐น ๐ฃ๐ฟ๐ฒ๐ณ๐ฒ๐ฟ๐ฟ๐ฒ๐ฑ ๐ฆ๐๐ผ๐ฐ๐ธ โ Preferred shareholders have priority over common stockholders on earnings and assets in the event of liquidation, and they have a fixed dividend (paid before common stockholders). Iโve seen almost all Venture Capital deals use Preferred Stock. Basically, they get their back before you do. They also get nifty little add-ons like dividends and participation rights (extra ways of squeezing cash out).
๐น ๐๐ผ๐บ๐บ๐ผ๐ป ๐ฆ๐๐ผ๐ฐ๐ธ โ The type of stock most often used for investment. If your legal structure is a Limited Liability Company, you might have to change it to a C Corporation to begin selling Common Stock. Most Angel investors are fine buying Common Stock as itโs the same type of ownership you would have as an entrepreneur. One of the only ways for an entrepreneur to get Preferred Stock is if you put a significant amount of your own cash into the company.
๐น ๐ช๐ฎ๐ฟ๐ฟ๐ฎ๐ป๐๐ โ A warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date. Warrants and options are similar because the two contractual financial instruments allow the holder special rights to buy securities. Both are discretionary and have expiration dates. The word warrant simply means to โendow with the right,โ which is only slightly different from the meaning of option.
๐น ๐๐ฒ๐ฏ๐ฒ๐ป๐๐๐ฟ๐ฒ๐ โ A debenture is a document that either creates a debt or acknowledges it, and it is a debt without collateral. In corporate finance, the term is used for a medium- to long-term debt instrument used by large companies to borrow money. Basically, it gives companies the opportunity to borrow money from investors instead of going to a bank.
๐น ๐ฆ๐๐ผ๐ฐ๐ธ ๐ข๐ฝ๐๐ถ๐ผ๐ป๐ โ A call option on the common stock of a company, granted by the company to an employee as part of the employeeโs remuneration package. The objective is to incentivize employees to behave in ways that will boost the companyโs stock price. If the companyโs stock market price rises above the call price, the employee could exercise the option, pay the exercise price, and be issued ordinary shares. The employee would experience a direct financial benefit from the difference between the market and the exercise prices. If the market price falls below the stock exercise price at the time near expiration, the employee is not obligated to exercise the option, which will lapse. Restrictions on the option, such as vesting and non-transferring, attempt to align the holderโs interest with those of the business shareholders.
๐น ๐ฃ๐ต๐ฎ๐ป๐๐ผ๐บ ๐ฆ๐๐ผ๐ฐ๐ธ โ A form of compensation where a company promises to pay cash at some future date, in an amount equal to the market value of a number of shares of its stock. Sometimes companies prefer to use Phantom Stock for their employees because it gives them similar benefits to Stock Options but without voting rights. Additionally, Phantom Stock doesnโt need to be purchased later than Options, so there is no money out of pocket. However, Phantom Stock is often taxed like a cash bonus, so employees cannot take advantage of long-term capital gain tax discounts like with Options.
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๐ฑ So, where do you start? Thatโs a good question. You have planted the seeds, and now itโs time to develop the roots of your company with a strong management team. Once you set a solid foundation in place, your company will flourish. Investors bet on your teams as much as they do your company, so select your branches wisely.
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Remember, at the end of the day, ๐ถ๐โ๐ ๐ฎ๐น๐น ๐ฎ๐ฏ๐ผ๐๐ ๐ฐ๐ผ๐ป๐๐ฟ๐ผ๐น. Even though Facebook has raised several rounds of capital, Mark Zuckerberg still controls all of the votes for Facebook. If you position yourself correctly, you can do the same.
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I hope you found this post helpful as you consider raising capital. Let me know if you have any questions or need any additional advice for your own funding process. ๐ฉ
