Capitalize the Company

“There’s nothing wrong with raising venture capital. Many lean startups are ambitious and are able to deploy large amounts of capital. What differentiates them is their disciplined approach to determining when to spend money: after the fundamental elements of the business model have been empirically validated.” – Eric Ries, Author, Lean Startup

Novice entrepreneurs spend too much time trying to raise money. It’s a very time-consuming process that takes six months if you have a smoking hot business — and it takes forever if you don’t. Seasoned entrepreneurs don’t waste time chasing investors until such time that their business can afford them to do it and the odds of success are good.

All you should be thinking about and doing at the start is getting customers; they are the best way to finance your business. If you get traction in the market, you have a better chance of raising money at reasonable terms. The best time to raise money is when you don’t need it.

At the outset, you need to be able to capitalize the company with “insider” money. Insider money is invested by the founders and possibly by family members and friends. This is called seed capital. You’re going to need enough seed capital to accomplish most of the things outlined in the previous chapters, including forming the company, conducting primary research, building a prototype, scrubbing the plan, and securing the intellectual property.

Outside investors are NOT going to give you money to accomplish these tasks unless you are a Rock Star entrepreneur with a successful track record. Even Mark Zuckerberg and his friends had to finance Facebook with their own money until they were able to show traction. The possible exception is what is called “convertible debt,” or a “bridge loan.” These financing instruments may be available if you have exceptional intellectual property (like a patent) or are using the money to purchase tangible assets.

If things go well, you’re probably going to need outside capital at some point. Outside capital means money from accredited investors. It may be grants or loans. The SBA is a good lending source. There are also a bunch of asset-based lenders, including PayPal and Guidant.

For some startups, equity capital is available from angel investors or venture capitalists, meaning you will need to sell shares in your company. This is usually done as a Series A Financing.

The act of taking outside money increases a company’s legal obligations and liabilities significantly. The process of investor due diligence is akin to undergoing an intense tax audit. Everything there is to know about you and your company will be discovered and scrutinized.

Things to Think About and Decide

First, think about how much money you will need to accomplish the steps outlined in this guide, to get the business to a point where it is either cash-flow positive or able to attract outside capital.

Second, think about how long it will take to accomplish the steps and how long you can go without a salary.

Third, decide how much of your personal savings or your credit you and your co-founders can afford to risk.

Fourth, think about how much seed capital you might be able to raise from family and friends to cover the shortfall between what you need and what you and your team can invest.

Fifth, think about what other sources of capital may be available to you, such as loans or grants.

Sixth, decide whether your business is fundable and what needs to happen to attract funding.

Things to Do and Avoid

Do not pitch investors until you are 100% ready with a launched offering, some market traction, and prepared materials.

Do, when you are ready to raise money, identify three to five critical growth metrics that will validate your revenue assumptions with investors.

Do, calculate the amount of money you need to raise to operate for a full year multiplied by 1.5.

Do, develop a use of proceeds for the desired money by identifying at least three quantifiable business objectives related to revenue that you can realistically achieve within three months, such as a specific number of customers or a volume of usage.

Do, update your Executive Summary and PowerPoint presentations with the amount of money and the use of proceeds.

Do, identify at least 50 local angels, angel groups, early-stage venture capitalists and other investors in a spreadsheet with their name, email address, telephone number, title, company, relationship, LinkedIn (or similar profile), related investments and notes.

Do, identify at least three events over the next month where you can meet investors from your target list face-to-face and make plans to attend the event. BONUS: apply to present at pitch events.

Do, create an investor pitch deck that shows how you are mitigating the risk for investors and offering the potential of a substantial return on investment.

Do, create a detailed company profile on AngelList, GUST, and/or another startup company network.

Do, check out the appropriate Crowdfunding platforms for your space.

Do, list your founders and your company in CrunchBase.

Do, create, test, and refine a 30 second “elevator pitch” on your company. A sixth grader should understand it.

Do, assemble all the due diligence documents that will be required by prospective investors.

Recommended Readings & Resources

Raising Venture Capital, Pitching to Investors Travis Milks, Stonehenge Capital

The 10/20/30 Rule of PowerPoint Guy Kawasaki

10 Dumb Things Entrepreneurs Say to Investors by Mike O’Donnell

Top 10 Toughest Questions Asked of Startup Founders (and how to answer them): PART 1 by Mike O’Donnell

Top 10 Toughest Questions Asked of Startup Founders (and how to answer them): PART 2 by Mike O’Donnell

Tough Questions Smart Startup Founders Should Ask Prospective Investors by Mike O’Donnell

Startups.com

Startup and funding resources.

AngelList

List your startup, network with angel investors. A good place to see what other startups are in your space, going after the same market.

When Your Startup is Fundable but You Aren’t

by Mike O’Donnell

Gust

Gust connects startups with the largest collection of investors across the world.

KickStarter

Raise money for creative projects or to develop your app.

Florida Funders

A crowdfunding portal that connects accredited investors with startups seeking funding.

Due Diligence Checklist and Sample Term Sheet,  StartupBiz.com

SAFE Note and Convertible Note docs, by Cooley

Crowdfunding Platforms, by Fundly

The Five Star Startup: A Guide for Determining Which Startup Opportunities are Worth Your Time and Money, by Mike O’Donnell.


If you found this material helpful, please leave a review on Amazon. You can also download the entire eBook on Kindle free of charge.