The Money Chase: Should You
Posted by Dr. Earl R. Smith II in Venture Capital, tags: adviser, advisory board, angel investor, board of directors, CEO, chairman, coaching, consulting, director, earl r smith ii, earl smith, Executive Coaching, federal circle, federal contracting, funding, Governance, government contractor, investing, investment, investor, Leadership, leadership assessment, leadership coaching, leadership development, leadership styles, management assessment, managing partner, Personal Growth, the federal circle, turnaround, Turnaround Management, Venture CapitalDr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com
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I attend a fair number of ‘presentation events’ over the course of a year. Mostly they have the same format. A panel of investors has been brought together. Applications for submission have been received from a wide range of start-up companies seeking funding. The applications have been reviewed and a lucky few have been invited to present. The room is packed with investors feeling important and the center of attention, nervous teams going over their last minute check lists and envious audience members. As the program advances, it is clear that many of the presenting teams have not asked a very simple question. Should they be in the Money Chase at all?
It is What We Do
I have put this question to dozens of teams and their responses have covered a wide range. But one type of response is particularly interesting. It goes something like this, “Of course we should be in the Money Chase. We are entrepreneurs and that is what entrepreneurs do.” The first time I heard this, I was taken aback. I asked the team what they meant by it. It was clear from their replies that they had a particularly provincial and rather limited view of the process of starting and building a business. They obviously believed that the way you started a business was to get a ‘good idea’ and then find somebody to fund you. Having completed this process successfully, you were in business.
Although the understanding of this particular team was extreme, I have found that the general attitude infects many of the presenting teams. They see the process more or less the same:
- A. Get an idea
- B. Assemble a team
- C. Write a business plan
- D. Get an investor
- E. You are in business
When I tracked the origins of this understanding, I made a surprising discovery. Most of it originated during the time that one or more of the team had spent in a university entrepreneurism program. Some had degrees while others had attended seminars or belonged to programs that were affiliated with universities. The point is that their understanding of what it means to be an entrepreneur came intellectually before experientially. If you believe that starting a business is a journey from A to E, you are probably in for a rude shock.
The Costs of the Money Chase
Every hour you spend chasing investors is one you cannot spend chasing customers. At bottom, business is about having customers who pay you for your product or service. How much they pay you, when compared with how much it costs you to deliver, determines your gross margin. That margin is reduced by overhead. Overhead includes the time, effort and resources you commit to the Money Chase. For most start-ups, this cost is far higher than they realize. Here are a few examples:
- The Distraction of the Senior Team: The overriding objectives of a start-up team should be to prefect and monetize the value proposition. Nothing else approaches that in importance. The Money Chase takes senior members of the team offline. Instead of pushing to meet these two objectives, they spend large chunks of time preparing and making presentations to investor groups. Such a talent drain may make sense after initial successes with customers, but it is seldom wise prior to that. Too many teams decide to chase money too early in the game.
- A Dysfunctional Culture: The message that senior members of the team put out through their focus on investors can be very corrosive. “The real game is the money chase, not the business.” If the Money Chase comes to dominate the activities of the founders too early in the process, the team will divide into two factions; the group that is chasing funding and the others who have been left at home to tend the fires. This is like sending your first-stringers out to the press conferences while having your back-up players actually play the game.
- The Message to Potential Customers: The role of the senior founders in building the trust that leads to potential customers becoming customers cannot be overstated. If a decision-maker is going to risk his job by going with a start-up, he will want to first build a strong relationship of trust with the CEO and other members of the senior team. What message does it communicate then the response is, “Bob is not available. He is busy with potential investors. You will have to deal with us.” The answer is simple. It says to the potential customer, “You are not as important to this company as the Money Chase.”
These are just a few of the costs. Chasing funding is a very expensive process. It can suck the energy out of a start-up and doom it to failure. In the very early stages, founders should be focused on the duel objectives of perfecting and then monetizing the value proposition. Until they can demonstrate an ability to do that, they should not be involved in seeking funding.
Threshold Conditions
So, what are the minimum conditions? How far along should a start-up be before it enters into the Money Chase? Here are a few suggestions:
- Prove the Model: A strong team will quickly refine the value proposition and begin to generate revenues. These first steps are really the only way to prove that the company, and the team, has something that customers are willing to pay for. Most investors consider this a threshold condition for taking an investment opportunity seriously. If you cannot meet that minimum condition, you need to wonder why you are being allowed to present. The answer to that question may not please you at all.
- Use of Proceeds: What are you going to use the money for? It may seem strange, but this question is most often very poorly answered by presenting teams. Good entrepreneurs get a lot of value out of each dollar they have to spend. Great entrepreneurs are parsimonious almost to a fault. But most of the presenting teams at these events have a sharply different vision. The largest amounts in their use of proceeds chart is typically for their own salaries. From an investor’s perspective, this is very poorly spent cash. Sure, the team may take subsistence-level compensation until they generate sufficient revenues to cover their salaries, but they are getting equity in the deal and that should be enough. There are far better, much higher-impact, areas for using scarce financial resources. For a start-up to be investment grade, it should have already reached this point. Entering the Money Chase before reaching it is a waste of resources.
- Wasted Overhead: Have you ever heard the saying, “He has more money than brains”? Well, start-ups can have more money that productive uses for it. The result is a waste of resources through spending that does not increase the chances of success. Even the anticipation of funding can exacerbate this tendency. I recently reviewed a business plan for a pre-revenue start-up. They were months away from having any customers, but the business plan and use of proceeds called for a fully developed team. They were planning to hire a Vice President of Marketing and a Director of Human Resources right away. They also had allocated funds for a senior-level Chief Financial Officer. The ‘nut’ for the full team overhead, before benefits, was going to be well over a half a million dollars annually. And this without dollar one of revenue in hand. Believe it or not, an investor funded the proposal. During my last visit to the company’s well appointed offices, I got the feeling that I was visiting a resort of some sort. Their corporate motto should be ‘no worries’. But, of course, there is a worry. The cash will eventually run out, the investor will face a big loss and the company will go out of business. But for now, martinis all around! The hard truth is that flooding an early-stage company with funds too early in the process can seriously harm its chances of success.
A Few Good Rules
Deciding when to enter the Money Chase is one of the toughest decisions that any start-up team faces. Enter too early and you will siphon off time and energy in a hunt that has little chance of succeeding. Enter too late and your company will suffer from a lack of critical financial resources. Here are a few rules to consider:
- Bootstrap as long as possible: Try to get as far a possible on your own resources. This is by far the least expensive way to build a business.
- Be creative in tapping all sources: There are many sources of funding. Make sure that you do not overlook any of them. Many companies use government programs like SBIR and STTP to fill early-stage needs. Others pursue grants and similar sources. Some find potential customers that see their value proposition as good enough to support. Remember that venture funding will be one of the most expensive options. Also remember that it gets less expensive as your company grows.
- Build the revenue: You have a much better chance of getting funding on favorable terms if you have customers. Remember the old saying, “Amateurs have markets and professionals have customers”. The Money Chase gets easier if you are running a going concern.
- Get your team working effectively: One of your principal goals in the early stages is to get your team working effectively. They should figure out how to generate customers and revenue. They should also learn how to respond to customer needs. Demonstrating this can significantly improve your chances and sweeten the deal you will eventually get.
- Let your reputation attract investor interest: Remember that investors always have a hard time finding investment-grade opportunities. If you build an investment-grade company, they will seek you out. A good reputation for accomplishment will also open up alternate, less expensive sources of funding.
- Hold off as long as possible: The further you get towards true profitability, the easier the Money Chase will be.
If you follow these rules, a strange thing may happen. The money will start chasing you. That is truly the way to win the Money Chase.
© Dr. Earl R. Smith II
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Related Articles:
-
The Money Chase: One Way to Avoid Being ‘Avoided’
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The Money Chase: Who They Do Not Invest In
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Funding Strategies for New Businesses
-
Angel Investors to Avoid
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Angel Investors – The Good, Bad and Very Ugly
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Presentations from the Investor’s Perspective
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Dr. Smith is Managing Partner of The Federal Circle. The Federal Circle partners with teams and existing companies. We help them up their game and win big in the Federal space. We also arrange funding for acquisitions and expansion by acquisition. Our model is based on the belief that, if you select the very best and work with them in a highly professional and focused manner, the results will be truly amazing. He is the author of Amazing Pace: Turbo-charged Business Development – a book that shows how Advisory Boards can dramatically increase revenue. Dr. Smith is also the author of Dream Walk: Parables for the Living – a book of Raven Tales and exploration.
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RaisePrivateCapital.comRichard Odessey, Ph.D. wrote:
I like Nathan’s response. And I would add:
A startup should start planning how to raise capital, the day the idea to create a company occurs to them. How:
1) create the pitch docs (bus plan, PPM, exec sum, elevator pitch, demos etc).
2) More importantly the entrepreneur needs to do a thorough SWOT analysis (e.g. in depth analysis of strengths, Weaknesses, Opportunities, Threats). There should not be a single question or challenge that you can’t answer with facts and figures.
3) Assemble a top-notch team to give you credibility with sophisticated investors
4) until you can complete #’s 2 & 3, restrict you funding efforts to FFF (friends, family & fools).
5) After completing 2 &3, Angel investors are a good source.
6) When risk is low (proof of profit & upside potential) and you need $2MM+, VC’s are an option
7) Finally and most importantly, you need to develop the right networking skills to put you in contact with the right investors.
If you want immediate personal help, reply privately and we’ll set up a teleconference to tailor a program to your needs.
If you’d like to start the journey on the right and most successful way to raise capital, join us at:
http://www.RaisePrivateCapital.com
James Wallis Martin wrote:
Hello Earl,
One of the issues that should be brought up in your article, is the issue of transitioning from bootstrapping business to product/service business.
For example, JB Metrics has been around for five years, we have bootstrapped the business by doing custom application development work for clients, however that is essentially a bespoke systems development and integration business. We have spent the last five years also developing a wide range of cloud computing applications (all from our profits and personal investments). So even though our revenue has more than doubled each year and we passed the million mark a year ago, our net profit has been nil (all reinvested in product R&D) and only now are we launching our products (after having reference site customers already on board using our products in production).
The problem is our track record is in our bootstrapping business, not the products we are looking to globally launch now. The other challenge is to transition from the bootstrapping business (and usually its up close and personal relationship with the end client, to the mass production and global market where we will no longer deal with the end customer, rather with reseller partners and system integrators). So even though we have been in business for five years with a successful track record, the bootstrapping we did is not exactly in the same line of work as what we are moving into, hence the investors are having difficulty placing a valuation on the company. The current valuation would be on the bootstrapping business, the fact that all profits were reinvested in what is seen essentially as a different business model, makes the valuation more challenging, that the money will go toward the new business model of which there is limited existing business (in essence only the reference site customers – a total of eight customers) makes it hard for them to place a valuation on the new business model.
There are three scenarios that need to be covered in the article to make it complete:
1) Those that cannot use bootstrapping to fund the seed stage
2) Those whose bootstrapping can fund the seed stage but is not what the main business is going to be in (in otherwords the bootstrapping business was temporary for providing seed funding)
3) Those whose bootstrapping can fund the seed stage and is what their business will continue to remain as it gets into the next stage
I am sure you can come up with easier (less verbose) descriptions, but I hope that helps flesh out the article. Otherwise a good article.
James
Eric Klein wrote:
This a good article, but it tends to presume that all companies can bootstrap – and in this day and age of Internet or iPhone based companies it is easy to see how that is the case.
But there are a number of companies and business models that seem to require funding for the R&D stage (hardware, biotech, cleantech, etc) where this model is not true – thus it is hard to work on revenue and customer base when you are talking 2+ years of development that needs serious funding.
That said, many of the ideas presented should be used by early-stage companies where possible.
Steven Lorenz wrote:
I believe immediately. But is only in terms of what I call, ” starting the clock.” Getting funding realistically could take a very long time. You may need to dedicate as much time, money and effort to get the money than you could ever imagine. Go to VC conferences, angel meetings/panels, meet people. Tell them your name, company, idea and that when your ready you will approach them. Pre-qualify the investors if they are right for you, your company, etc. and vice versa. When you come back later with follow through, that will build credibility. It takes a long and intense effort to raise money. Especially in this economic environment. In all probability, you will start out with your own , ” skin in the game,” or ” friends, family and fools ,” to get off the ground. The bare minimum you need is a summary, plan, financial projections and a world class team. Hopefully you have a disruptive idea or technology, not a, ” me too,” company. Preferably, you get started, up and running and already have revenues. This is really what investors, especially VC’s want most. Most investors are followers, not leaders. Does your company / idea have Patented IP? Is it a huge growing market? Can your company be a billion dollar company? To you have choke points and unfair competitive advantages? Is your idea, technology, business model truly revolutionary and disruptive?
The time and effort to truly get funding is almost an infinite time commitment and a gargantuan effort. Good luck all! I have been raising money for 27 years, over a quarter of a century and it has not gotten easier, it is more difficult today. Good luck all!
Alex Gerstenzang wrote:
Dr. Smith’s article and it’s views are so sound and heartening to hear. I believe if more companies solidified their core business and established stability … then gaining investors would be much easier. I do think that the similar due diligence needed for the money chase is needed to keep an organization on track and focused. I feel this same mania to achieve the money chase is similar to the acquisition need. I have seen repeatedly where organizations think acquisitions are the answer to business stability without proving first they can drive the business with it’s core structure, processes and teams.
Paul Germo wrote;
Thanks Dave.
I read an article in which the author asked Dave Thomas (the founder of Wendy’s) what is the most important word of advice he would give to young entrepreneurs. Mr. Thomas responded “A Business Plan – you need a very solid Business Plan.”
The author then asked if Dave Thomas had one when he started out, to which he responded “No”.
He then went on to illustrate how sometimes Great business growth can happen without a Business plan. He said sometimes the best plan is NO PLAN AT ALL!!
Paul S. Germo
Robert Donnelly wrote:
Before the money chase they need to develop a good business plan and thorough break-even analysis for the first year of operations so that they know how much money they will have to chase for.
Thanks for four very interesting comments. The demonstration that revenues in increasing levels can be generated is what most investors are looking for these days. Dr. Smith
fgroup.com.arGerardo Saporosi wrote:
A company should not look after profesional venture capital if still doesn’t have:
1- an “ALPHA test”, that is to say, a “first prototype”, whatever form this prototype may have
and
2- a “BETA test”, that is to say, a “first market test”, testing the product and the business in a reduced regional marketplace, and thus, leaving no doubts that there is somebody willing to pay for the product.
ALPHA is fed by F&F (family and friends, I do not include like others “fools”), and BETA is fed by the so called “Angels”. If a start up can show a good “success & failures table” after performing a BETA test, then it’s possible to think in making a pofessional fund raising.
Those of you that read in Spanish, could read my paper on this matters:
http://www.fgroup.com.ar/images/83518.pdf
Happy New Year!!!
Gerardo
Francois Meyer wrote;
Thank you for sharing this information, I will most definitely make use of it sharing this with my clients, if you don’t mind me doing so?
Wishing you enough!
Gary L Jamerson wrote;
Thank you for sharing this insightful information from your blog link. As a product designer I’ve have created something extremely exciting and no doubt will cause my genre of industry to take notice. But after reading your article I will control my temptation and work further on building customers from are current line of products. I don’t want our first stringers out of the game!
don norton wrote;
I agree totally with what you just said with out a well oiled machine available to make the money their is no proof it can survive if you have no skin in the game you won’t make the sacrifices to make it work.
James Scaggs wwrote:
@ Dr. Smith – Shallow motives such as those you listed above are beginning to give the entrepreneur a bad stereotype in my opinion. There are too many High Risk, High Reward, Run & Gun minded entrepreneurs who are choosing entrepreneurship because of either 1.) Don’t want to/can’t work for anyone else or 2.) The almost “Celebrity” type lifestyle of travel and media that surrounds the entrepreneurial culture.
I say there should be more “like-minded” well grounded entrepreneurs like yourself speaking up about this ridiculous school of thought. And to think our universities are actually teaching entrepreneurship this way is a bit of joke. I always wondered exactly how a university was going to teach entrepreneurship in the first place. Oh well I guess they found a way to capitalize on the industry even if they aren’t necessarily what I would call qualified to be teaching on this subject. Entrepreneurship is the one subject where teaching from people who haven’t done it is a complete waste of time and tuition dollars if you ask me!
Thanks for two great comments.
@ Leslie – I would suggest that the real question is not what the various phases are but what is necessary to launch into those phases. I regularly see founders following close variations of your outline. The problem is that they and their company are not qualified to actually implement the program – to engage in the money chase. Where form trumps substance, failure is a given.
@ James – I would suggest that one of the truly foundational problems with many ‘entrepreneurs’ is that they are focused on 1) raising money so that they can draw a salary and 2) getting rich from managing the team and business. Neither of these is a good reason to launch a business. As for learning from others mistakes, I have found that most founders are so fixed on a high opinion of themselves that they consider it a weakness to even inquire. I once was part of a team the offered support to about a hundred start-ups. It was a government-supported program and cost nothing for the companies to participate. The companies were resident in a number of incubators. The support team was made up of very experienced and successful serial entrepreneurs. The response was tepid and one of the incubator managers summed it up this way, “they think they know it all and don’t realize that they need help until they are about to go out of business – and then it is too late.” As a result, one of my favorite sayings is, “you can lead a horticulture, but you can’t make her think”!
James Scaggs wrote:
The Money Chase in itself is a misnomer for most entrepreneurs in my experience. If the business is qualified for proper investment, you shouldn’t have to actually chase the money.
Preparing the materials and courting potential investors is appropriate under certain circumstances but I agree with Dr. Smith that too many universities focus on the capital raising concept in entrepreneurship and fail to teach the basic principles such as entrepreneurial risk management. Many of the entrepreneurs looking for investments have no idea of how potentially disastrous and time consuming taking an investment from the wrong sources can be.
When should a company begin seeking investors? I suggest that a company should begin seeking investors when there is a viable market opportunity that cannot be capitalized on through organic growth. There needs to be a compelling reason as to why you should be spending your time and resources soliciting funds rather than attempting to capitalize on your opportunity with your current resources.
What should a company have before seeking investors? Obviously I believe a company needs a proven and sustainable business model in conjunction with an explicit purpose for the funds. Too many entrepreneurs take more money than is necessary leaving a huge cushion and then become lax in their cash flow management. This concept that the well never runs dry leads to a different style of cash flow management than the traditional boot strap entrepreneur mindset.
How much time and effort is necessary to raise capital? This depends largely on the entrepreneurs business opportunity and what they are willing to give up in terms of equity. If all of the materials are prepared and the company is performing well and has an identifiable need for cash the process does not need to be drawn out, but it does require some direction. I suggest working with a financial advisor or qualified business consultant to develop a strategy so you aren’t going in circles. It will pay off in the long run!
The key assets that are necessary are proof of concept, intellectual property, human assets, and a strong customer base. A unified management team is essential to the capital raising process because this process requires the CEO or head of the company to leave the body of the company. When a company is operating on a daily basis without its’ head things can spiral out of control very quickly if the proper supporting management don’t possess the necessary emotional intelligence to continue the daily leadership of the company.
Anyone looking for advice on capital raising feel free to contact me. I have a unique story I feel would benefit anyone involved in this process. Wisdom is learning from others mistakes so you don’t have to make mistakes!
Leslie McKerns wrote:
Great stuff Dr. Smith. We recommend doing it this way: Phase I: An Investor Ready Presentation used to attract, interest and pre-qualify potential investors, whether venture capitalists, angel investors, affiliates or partners, and;
Phase II: A detailed Investor Ready Business Plan, structured to show the strength of the parent company, present the business proposition and its attractive future for potential investors.
The Investor Ready Presentation outlines a novel idea, outlines its potential and provides a powerful marketing, PR and sales tool that can be used while the Business Plan is being created and after, for presentation in person, for download on websites, in seminars, investor meetings and for digital and direct marketing.
The Investor Ready Business Plan is not mere fluff, but a sound document with all the background, people and financials involved, plus an honest assessment of danger as well as potential.
You can started with the first Phase, and therefore identify potential interested parties and the strength of the actual market interest, but you won’t get money until Phase II is ready for their inspection.
Darlene Cypser wrote:
There is some comparison to a company that has an invention which requires a new manufacturing facility, i.e. the invention cannot be manufactured by any current facility. On the other hand is common for people to invest in an individual movie rather than an entire production company and you never see people invest in just one widget machine.
On the other hand, if someone were investing in the whole company, there are ways that production companies earn income other than by licensing their movies.
Some production companies make their initial funds by providing production services to other companies such as other production companies, advertising and marketing firms, television stations, even planners, etc. A lot of people who produce TV commercials and industrial videos would rather be shooting a movie but the others pay the bills in between.
Others, such as ours, act as sales agents helping other filmmakers who are less familiar with distribution license rights to their movies and receive commissions.
We also have income streams from prior movies, soundtrack CDs and downloads, online advertising, licensing of stock footage, and renting out our equipment.
The biggest difficulty with financing the production of a feature film is that you burn through a large chunk of money in a short period of time, usually one to two months. A company that may have a small number of employees on a daily basis suddenly has to take on a large number of employees or contractors who must work on a tight schedule.
That is somewhat similar to construction of a factory but banks are far less secure with a movie as collateral than they are with real estate, and with good reason. So they require completion bonds and other things to bolster the asset, if they are willing to loan at all.
Darlene, Thanks for the comment. Your particular industry has difficulty in raising investment because revenue is always generated well after the investment is made. Most companies have the ability to generate real revenues prior to taking investments. Dr. Smith
Darlene Cypser wrote:
Earl: I read your article last night and posted a link to it on my Facebook page where we had been having a discussion of filmmakers seeking funding. (I’m a movie sales agent. I receive frequent requests for funding even though I don’t do it.)
I think for any business, but most especially one in the entertainment industry, they need a sense of reality. A business plan that picks a $5 million budget figure out of a hat and offers an inexperienced production team and a wish-list of B actors while listing $90 million Martin Scorsese movies with A-list actors as “comparables” is not realistic.
Angel investors and VCs I’ve spoken to tell me that the team is the most important factor to them. The team needs experience. It needs commitment. It needs fire.
Time and effort? All out, busting butt on little or no pay during start up.
Bill Abel wrote;
Dr. Earl. I want to thank you for your incredible wealth of information and direction. You have a great way of writing with easy understanding. I look forward to reading more of your work.
Again, thank you!
Jim, Thanks for the comment. I am glad that you found the article useful and the source of reminiscences. The piece was drawn from many experiences – both mine and others. I also hope that it will help aspiring entrepreneurs better navigate the money chase. Dr. Smith
Jim White wrote:
Read the article and the three part series ” The Money Chase” and found them to be very good. As an entrepreneur who has raised funds from VCs, Angels and Corporations, I chuckled and cringed as I saw my own early efforts depicted.
Over much time, frustration and yes, success, I learned these lessons but it would have been great to have had these insights in those early days.
I commend you for your contributions and hope many aspiring as well as”well healed” entrepreneurs take advantage of your insights. I also think many investors could benefit as they are sometimes as clueless as some entrepreneurs.
Continued success!!!
Lisa C. Clark, MBA wrote:
Hi Earl,
Based on my experience with start-ups pitching for money, and lessons learned from my own current business Textiles for Thinkers, LLC and launching its first brand Thinker Clothing(tm), “Knowledge as Your Style”(tm) offering designs highlighting innovations in Science, Tech, Engineering and Math (“STEM”), it’s my view that companies should start the money chase when they have:
- A list of solid, named, paying customers, preferably repeats
- Products that meet the current and future needs of customers who are expressing clear and ongoing interest and financial commitment
- A supply chain strategy in place, with partners on board, to get those products to market.
I spoke with prospective investors when I was just forming the company.
==> Now I have hundreds of customers on several continents, Thinker Clothing(tm) is worn on hit TV show “The Big Bang Theory”, was presented at the 2009 Oscars, and a national retailer has invited me to become a vendor.
Prospective investors wanted me to do the heavy lifting and prove the concept. They expected me to be on it more-than-full-time and to invest my own capital. My key assets have been unique IP, copyright-registered and trademarked, best-of-breed print and textile partners (“you’re known by the company you keep”), and tech investors want to see a patent portfolio for the home run return. Having a full management team in place is preferable if possible, and most highly desirable is a world-class buyout partner already on the advisory or management board.
Made it through The Dip and the downturn — trial by fire. Now to growth.
Lisa
dr-smith.infoCedric, Thanks for your comment. I agree with your last point. I suggest that a fairly formal approach is best. In a article titled Red-Teaming: Improve Your Chances of Getting Funded: http://www.dr-smith.info/red-teaming-improve-your-chances-of-getting-funded/ I describe a process of forming and managing a review of a funding request. Dr. Smith
Cedric Oudinot wrote:
Seeking formal external capital is a normal exercise but should be postponed as much as possible,exhausting all other cheaper options first(angels,friends,relationships etc).My view is that speculative shareholders will ask for a high risk premium for early stages company,potentially creating a similar pattern to debt overhang and artificially limiting potential growth.
A company should at a minimum have some reasonable level of market validation,which is one of the most powerful lever in negotiating with capital suppliers.
Finally,I would role play and see it from the potential investors side: they are investing in a product/service,a potential market segment,in an executive team with experience in the target market and a sound business model. A company seeking capital should at a minimum think on how they rank on these factors prior to entering the “money chase” game.
myonlinetoolbox.comBrian Javeline wrote:
John,
I like your comment about “but it has to be the right investor”. It has taken me a lot to get all these people on the following link
http://www.myonlinetoolbox.com/CorporateInfo/Executives.aspx
And I did have my previous experience occur that when I no longer needed it that the money started to come to our front door … why? … becuase risk was much more reduced and that is where you leave the Angel attitude behind and begin entry into the real VC world.
Looking for partners is hard but not impossible, and it doesn’t hurt to just keep refining your pitch for all. Wishing you the best.
Brian
John Buckner wrote:
For the life of me I can’t figure out really who gets what money and when. I had an experience similar to Brian’s on the first round. However, I pitched over 300 angel investors over 6 months to get my first $100k. The second $100k was easier. I have seen technology and less reputable companies get massive influx of investment capital and I have to ask myself how, why, and should they have.
Now that we have developed the technology and proven it with huge success, I am still finding it difficult to know what it takes to prove to investors that I WILL NOT FAIL! LOOK WE DID IT! Funny thing is, I think when I reach the point of being able to “prove it” I may no longer need it. That is both a curse and a blessing.
So my theory on the timing of raising capital, is to constantly tell your story to everyone. I am finding that it is beginning to pay off. Not only with investors, but with people coming to see what I am doing is cool and they tell their friends about it. I am also thankful for some good mentors that are able to tell me to sign or run.
I am currently on the hunt, but it has to be the right investor. Money is vital, but I believe it is secondary to having great partners that believe in what your doing.
Thanks for your comments…I learn much from them.
John Buckner
President/CEO/Founder
Brian Javeline wrote:
Earl, Thanks for the comment. I’m afraid that I can’t agree with you. I was able to find two different angel investors who did support me when the idea was nothing more than a vision, with a decent evelator pitch and one page summary. But I was not shooting for the stars when it came to valuation and was specifically looking for a first round of investment to help me better prepare for a second round. The initial investors came in at a very fair value (or obviously would not have invested), and I solidified the business model as well as the business and marketing plan (with their help), and was then able to obtain another round of financing for more than double what the investors contributed and of course a better valuation. Yes, I did have past business experience that made this possible for me so I do not want that overlooked. But I never did raise money before and 99.5% of the people around me told me that it would not happen. The remaining .5% consisted of myself and the other two co-founders. So to all entreprenuers out there … do not expect many people to be on your side when making a decision to look for capital. It is a learning process and the only ones truly on your side is anyone who has put some level of cash or assistance (without being paid) to back you. Never forget that raising money is a business for most, and that is OK since some people deserve the fees they charge, but many are in the same exact spot as you trying to have their foothold in an ever changing landscape. Best of luck to all.
Brian
Brian, Thanks for the comment. I’m afraid that I can’t agree with you. The fact that “the founder(s) have decided the business model has a reasonable exit strategy for investors” does not make a company investment grade. Most entrepreneurs that engage in the money chase have a radically overblown estimate of the value of their company. They putt out poorly supported projections in an attempt to established an unsupportable valuation. As a result, most entrepreneurs are more like carnival barkers – and mostly unsuccessful in raising funds. As I wrote in the article, nothing short of validation of the value proposition through generation of a growing and referencable customer base. No power point presentation, business plan or high-powered set of resumes can compensate for a lack of that. Dr. Smith
MyOnlineToolbox.com,MyOnlineToolbox.comBrian Javeline wrote:
A company should begin to start the money chase as soon as the founder(s) have decided the business model has a reasonable exit strategy for investors, not entrepreneurs who wish to just make a good living. Before setting out, they should have learned to pitch their idea in 30 seconds to a few dozen people who have absolutely no idea about the business they are referring to. The reason is simple, the entreprenuer has to bring everything down to an easy to understand concept since most people retain very little when hearing something new. After which, this should be repeated to financial people only so that the entreprenuer can hear the perspective of an investor looking to understand the market and how they can make money. Immediately after comes mastering an Executive Introduction so there is a follow up communication upon someone replying that they like what they hear and wish to see it on paper with a little more details. Immediately after comes having a self guiding Power Point Presentation so that the potential investor can now get a better picture of what you are presenting but with your words inserted on the screens so they see the flow of your thoughts. The biggest assest that will improve your chances is your organizational skills to track all the different permutations that will occur from Day 1 and never stop until you are either profitable and do not require any more investor money, or you have executed your Exit Strategy and paid back your investors. In the beggining it will be overwhelming since it takes as much time to prepare for investment as it does to start the company. Then over time it becomes more of a passive excercise in updating everything (including the Business Plan, Marketing Plan, Capitalization Table, your Company Minutes, etc.). Nervous about the extent of my reply? DON’T BE since it is just a part of the process and works IF YOU HAVE THE STOMACH FOR WHAT IT TAKES. It was some rather smart people warned me about this since I never raised money in my 3 previous companies, and now, with my new venture http://www.MyOnlineToolbox.com, I have raised capital from six investors in CA, MN, NJ, FL, Canada and Britain. And I am still not fully capitalized and am prepared for serious inquiries.
Brian Javeline
President & Co-founder
http://www.MyOnlineToolbox.com
2008 Dell Top 10 Innovator
2009 Forbes America’s Most Promising