Fundraising Tips For First-time Startup Founders
Many first-time entrepreneurs obsess about fundraising, and worse, let it take priority over what actually matters–building product and talking to customers. Having raised more than $30M of angel and venture capital across three of my own startups, I’ve made my share of fundraising mistakes and want to spare first time founders some pain with some hard-earned lessons.
BEFORE FUNDRAISING, CONSIDER NOT FUNDRAISING
Excluding certain specialized industries (e.g. pharma, energy, medical devices), it’s generally inexpensive to build a company these days. Even if you’ll eventually need to raise capital, it’s possible to prove your initial assumptions and verify “product-market fit” (i.e. that people want what you’ve got) before shopping for investors. As a sign of just how much has changed, when I was starting my first company less than a decade ago, I had to buy RAM, CPUs, motherboards, and other components, build my own servers, and collocate them due to the amount of computation we were trying to perform that surpassed hosted server capabilities. Today, nearly everything has been turned into SaaS or “on demand software” (including server hosting), greatly lowering the amount of money required to verify that your business is real.
Avoiding raising money may make sense, not only in the beginning of your startup’s rollout, but also for the rest of its history. The proposition of taking $1 from an investor and returning $10+ to them creates a lot of pressure that may not make sense for your business or market when compared to bootstrapping.
VC money in particular carries the expectation that you’re going to build a $1B+ business, and relatively quickly. Somewhat ironically, as reported by the Kauffman Foundation, of the fastest-growing private companies in the United States from 1997-2007 identified in the annual Inc 500 list, only 16% had taken VC money. By that data, one could speculate that you have a higher likelihood of building one of America’s fastest-growing companies if you avoid VCs than if you work with them. Of course, many of today’s most recognizable tech giants did partner with VCs, and I personally have involved VCs in all of my startups, so you’ll have to evaluate your specific circumstances.
So why does this discrepancy exist? I have a working hypothesis that the very best VCs do positively contribute to building category-defining large businesses, especially technology-driven businesses. However, there are many business models that simply don’t need VC capital to grow quickly. Companies like Dell, ShutterStock, and Esri all purportedly never raised VC capital. Don’t take it as a given that you must raise capital to start a successful company.
IF YOU MUST FUNDRAISE TO PROVE INITIAL ASSUMPTIONS, RAISE AS LITTLE AS POSSIBLE FIRST
I estimate $5-50k is enough to prove initial assumptions and demonstrate that real demand exists or does not exist for most products or services. That’s a sufficiently small amount that you can conceivably scrape the sum together from family, friends, and friends of friends. These individuals will be more willing to invest on the merit of you and your character as a person, rather than your non-existent business. Other relatively low-hassle sources at this stage include university entrepreneurial grant programs and business plan competitions, which are becoming increasingly more prevalent. Some startup founders have even used Airbnb income (if you have a spare room to rent) to finance their early operations.
If none of the above is at your fingertips, you can still figure out how to hustle to put some money in the bank, ideally by doing something at least tangentially related to what you’re trying to build so you can gain helpful market insights, experience, and connections at the same time. It’s probably a waste of your time to speak with people who call themselves angel investors or VCs at this point, although you could get lucky if someone happens to like you. Some people advise that you speak with investors early and often to help develop relationships for down the road. That may hold true for later in your trajectory, but right now, it’s a waste of your time. Besides, they’ll probably try to give you advice about what to do. That’s the worst thing ever at your nascent stage– customer demand and data should be your guide, not investors’ advice. It’s unlikely most investors will be able to offer good advice that trumps simply getting your hands dirty and closely understanding what the customer wants.
Alex Mittal is Co-Founder and CEO of FundersClub. For more information go to www.fundersclub.com.