Thursday, October 18, 2007

Startup Funding-- A How-To Guide

Getting a startup funded isn't easy. There's lots of hype, "grip-n'-grin," and tearing hair out along the way.

You might also think that everyone knows everything about startup funding, but that’s not the case. Recently, someone asked me about the differences between angel and venture financing. With that in mind, I’ve put together a few options for startup funding.

1. CAN YOU BOOTSTRAP IT? SHOULD YOU?: Bootstrapping means you fund the startup on your own. Scrimp, save, and squeeze by on the minimum that you can. The advantage of bootstrapping is simple: you retain control. You’re not diluted (by investors), there are no additional chiefs (read: board of directors, influencers, etc.), you can go at whatever pace you see fit and retain your vision. But, the disadvantage of bootstrapping is a lack of capital (unless you’re rich.) That lack of capital can be a significant constraint. If you can’t afford to keep the business moving forward, you’re in trouble. And first-time bootstrappers frequently under-estimate what things will cost.

2. LOVE MONEY: The money you get from friends and family. If you can get, go for it. The benefit is that it should be easier to get the money (vs. raising from outside sources), and you’ll gain some experience pitching in a friendly environment. The disadvantage is that you run the risk of ruining personal relationships. And, unless your friends and family are wealthy, $20-$25k won’t get you that far.

3. ANGEL FINANCING: Angel and seed financing comes into play before a business has launched its product, or shortly thereafter. It’s the money you need to make it happen out of the gate. Amounts range from $25,000-$1,000,000. Venture capitalists that play in this area will often look at the $250,000+ range, whereas individual investors will be (typically) less. The higher you go, the closer it gets to a Series A (described below), which means more effort and paperwork to close.

4. SERIES A FINANCING: Series A investments can happen at a fairly early stage - just after launch, for example - depending on how long the company has existed beforehand. In most cases, a Series A is used once the company has shown some traction and needs more money to expand. It’s the money that will take you to new heights, massive revenues, cash flow positivity and a huge payday via acquisition (or some other exit.) At least, we hope that’s the case!
Series A financing ranges a great deal (think $2 million to $10 million or more) and Series A typically comes from venture capitalists. At this stage, you’ll want to bring in the strongest partner possible; the VC firm with the most experience in your space, the highest pedigree and the most success stories.

Be prepared to pitch... A LOT! Don't get discouraged; you will get better at it.

Get organized. This sounds silly, perhaps, but the more organized and professional you look, the more comfortable investors will feel. This is especially true when it comes to presenting financials. Know your financial models.

Get help. Seek out the advice of mentors, advisers and lawyers. A good lawyer can really help with more complicated deals.

Do your own due diligence. You’re about to get into bed with someone, you might want to check what they have under the covers. Don’t be afraid to ask for references.

Never stop fundraising. I’m definitely not in love with the fundraising process, but there’s no point stopping. Keep building relationships with investors, keep nosing around for opportunities. You never know how markets will shift and opportunities need to be capitalized upon.

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