Raising Seed Money08.03.11
A number of the startups I talk to are about to raise, are raising, or just raised a round. I've gotten quite a few questions around "how to raise". (This is obviously for seed stage.) I thought about this question a bunch and as opposed to there being a step by step process -- I noticed a handful of commonalities among companies that successfully raised (usually 1 of these 3 applied):
1. They have money from a true angel (friends / family).
2. They've gotten to a significant intermediate step. (acceptance into an incubator and raised upon graduation or got their product positive tech press and then raised off of that -- often from just responding to inbound inquiries)
3. They talked to a TON of potential investors (e.g. 30+ meetings for every investor. And an investor might only be coming in at $25K or $50K. Brutal.)
The first scenario -- true angel -- is pretty straightforward. Your (dad / mom / uncle / aunt / rich high school friend / etc.) gets your pitch / believes in you -- and puts money in. Maybe they had you jump through a bunch of hoops, maybe they didn't. Regardless -- they're giving you the ability to start your company.
The second scenario is quite commonplace nowadays. There's a ton of incubators and with the state of web development -- I've seen companies spend almost no money (because the founder(s) are technical and can design/develop the idea by themselves) -- launch, get positive press, and then the investors who read TechCrunch / All Things Digital / Mashable / etc. contact them and they're off and running. Incubators are similar in the sense that there's demo day and it's easy to raise off of it. Tons of investors are in the room and there's also a lot of social pressure to move quickly coming off of that day (or even before it.)
But let's say you're not in either scenario. You haven't gotten into an incubator, you actually need money to develop your idea, and you don't have a rich relative (or friend) who is willing to write you a large check.
A venture capitalist friend of mine and I were talking about an entrepreneur the other day and the phrase we used to describe him was, "He's a hustler." Those who are able to raise are able to raise because... they figure it out. I hate to use the trite / typical phrase of, "Every path is different." -- but I have seen so many paths with respect to this. Here are some examples:
1) Friends & family $.
2) Low burn, therefore able to bootstrap. Non-technical but no need to hire employees. (or can pay on a contract basis)
3) Low burn, technical founders, able to bootstrap. Launched, tech press, inbound inquiries.
4) Sweat equity for early employees and raised off of a working demo (and business plan.)
5) Got single lead investor (may or may not be well known angel or institutional investor) -- used that investor as (small) social proof to bring in others. Built the round successively through momentum. (this is very typical)
6) Incubator -- raised before demo day / raised after demo day / had demo day then had difficulty raising.
7) Got multiple interest levels (maybe interested / interested if institutional money comes in / interested if there's a lead investor) -- but that money is waiting for something else.
and so on.
Statistically, even if you get a meeting with an angel / institutional investor -- the odds that that individual will close with you is remarkably small. If there's one thing I would caution entrepreneurs here is the "oneitis" factor -- believing that person is the one. Odds are they're not. I would argue that the better mentality (and also better to help stay sane throughout the process) is that there's always another one AND a "no" or "not now" both mean "follow up at a later, more promising point." That later point could be when you have a lead investor, or a group of investors (a lead, maybe institutional money + prominent angels), or the product is at a later stage. I would say broadly that early investors (particularly friends/family or angels) here like to:
a) minimize risk / minimize the likelihood they're the dumb money (hence the desire to have someone well known lead the round and for them to follow on with the same terms)
b) be part of something that is going to succeed! (odds aren't great that it actually will -- but the momentum of having a great group of investors makes it feel like they're buying into a promising startup early.)
Here are a few mistakes that I often see when it comes to raising:
1) Not Being Organized: this sounds obvious, but I think it's good practice to have a giant spreadsheet of everyone you talked to, everyone you'd like to talk to, and what the outcome / status is.
2) Not Following Up at a Later Stage: This is critical when you get a little momentum. For example, before you get a lead investor -- it's going to be a ton of no's. But once you get one, you may be able to use that to flip some of the earlier no's -- however, I too often see entrepreneurs not even think about those earlier conversations thinking that those earlier no's are set in stone.
3) Not Thinking Broadly: Raising takes a ton of time. It's a lot of work just to get the meeting (even if it's via an introduction) -- then the meeting, pitch, follow-up, etc. And this goes for every single potential investor -- which could number in the hundreds. However, what I often see is that the entrepreneur has some sort of network -- it's their network + friends' network + early investors' network. I'll look at their investor spreadsheet / potential investor spreadsheet and ask really simple questions, "Have you talked to XYZ firm? Or XYZ angel?" Usually no. They've been so completely consumed just using their current network and not thinking broader. Now -- obviously they might not know a particular person -- but most of these people aren't hard to find -- whether it's through social circle, LinkedIn, just straight Google searches, etc.
4) Not Thinking Strategically Enough: This is at a little later stage -- but especially when a round is about to close, I like to ask the question, "Is there someone you'd like in this round that isn't?" Sometimes that's a specific person or firm -- but more likely, it's a class of firm / person. For example -- let's say the money is primarily friends & family + some institutional money. At that point -- are you able to get some prominent tech angels? And from there maybe beginning a dialogue with institutional investors? Maybe or maybe not -- but it's worth a shot.
The biggest thing though -- and a reason why I so respect this process and the entrepreneurs that go through it -- comes down to what I mentioned earlier -- hustling. It's hard to raise, it's humbling to raise, you have to sit through a lot of painful meetings and get a lot of no's (basically having your kid called ugly) -- but those that raise are able to slog through it all and just get it done.