Tuesday, January 17, 2012

Sources of Capital: Part 1

Shooting for brevity today. This is Part 1 because it's a long topic, only because people tend not to believe that they really shouldn't be trying to raise capital.

Few startups I coach or come across are ready for institutional capital. Getting seed capital from active tech angels or seed funds ain't easy either.

I'm telling you this because I want to save you some time and wandering alone in the desert. Most of us don't need to raise capital.

Yet.

Here's the criteria for me referring a startup to an investor, or vice versa. The startup has:
  • more than one person
  • revenue greater than the combined salaries
  • not necessarily profitable, but the path to profitability is obvious
  • a quantifiable, sizable market
  • a way of addressing that market from the bottom up. Never say "the market size is $10 billion, and we plan on capturing 1%". What investors care about is how you're going to capture 1% (business model) and when (trajectory). 
  • product that makes sense, looks good, works well
  • customer profile that aligns with the business model and projections. 
  • clear path to scaling.
  • existing investment from either trusted sources, personal debt, or personal stash. Skin in the game matters.  
  • passion
  • ethics. It's surprisingly easy to learn about someone's ethical stance (if they have one at all)
I rarely do any matchmaking--it's just not worth the risk on both sides of the equation. As I said, most startups don't have a robust enough combination of the listed stuff (I'm likely leaving stuff out) to warrant raising money. 

So if that's the profile, and you don't match it, what do you do to raise capital? 
bad stock photo illustrating someone else's point

  • Raise from customers. Don't have a product? Sell it anyway as a service job where you retain the rights to the code. Read this article on Bootstrapping by Greg Gianforte, then stop reading anything on the black hole of the interwebs and get to work. 
  • Play credit-card roulette. Amass a good number of credit cards and an American Express. Move balances around to avoid interest. Make the minimum payments.

    This is a risky move, but a lot of founders have worked it well. And accrued a lot of air miles, which is useful for your hopeful but largely unnecessary travel. 
  • now that's commitment...
  • Ask mom. Dad. The rest of your family. If you can convince your family to invest something that won't ruin your relationship if you blow it, it will help convince others to join in.

    Don't do it if you don't have a clear path forward, though. R&D is for nights and weekends. 
  • Day job. Nothing like someone subsidizing your R&D by having you do something of value to them and paying your for it. You still have nights and weekends, which by my simplistic math leaves you with at least another 50 hours/week, if you're slacking :)
  • State-backed investment vehicles like Ben Franklin Technology Partners. Well, scratch that. I think it takes way too long for too little money with a huge amount of ongoing documentation. I love the people at BFTP, but the program itself is a bureaucratic mess. 
  • Sell stuff. You really need all that crap you've collected? 
  • Raise from prospects/customers. Yes, I said it again, because that's really where you should spend your time. Sell something. "Nothing happens until someone sells something".

    If you're a consumer web startup and plan to make money on lead-gen or advertising, well, God help ya. That is a long, tough path and you typically need some good backing to get to sustainability. You might be able to pull it off with lead-gen if your target sectors generate high payoffs like financial services, mortgages, etc. But the most you'll likely get per user is $30/year, but it's much more likely to be between $5-$10/user/year. 
So get off the web and go sell something. This isn't a mystery, folks--the answer ain't out there waiting for you to find it. Get on the phone. Go visit prospects. 

Do what you have to do to pull in some sales, learn more about it, refine it, rinse and repeat. You'll get there :)

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