According to the experts, you can never be too rich, too thin or raise too much capital.
I beg to disagree–about the capital-raising part, that is.
Last week, I spoke with two startups that are in the midst of raising money. The first, a tech company, had just received a $5 million term sheet at a $10 million pre-money valuation. The second, a consumer products company, is trying to piece together its financing $25,000 to $50,000 at a time at valuations that it hopes will rise as the company grows.
Which company do you think is getting the better deal from its investors?
I’d understand if you picked Company A (the tech company with the big bucks term sheet). After all, the founders probably won’t have to raise any more money until the company gets acquired or goes IPO. But you may change your mind once you’ve heard the whole story. While the founders of Company A are getting a primo valuation for a pre-revenue startup with a technology platform that’s not yet completed, the investor putting in the cash is not a VC but a serial entrepreneur who wants to help run the business and get back in the game. Apart from the hit they’ll be taking to their equity stakes by selling such a big chunk of their business so soon, the founders may be taking on a partner who’s really a boss in disguise.
Company B, on the other hand, won’t have to deal with overbearing investors (after all, the high-net-worth individuals who toss $50,000 in the pot will probably spend more than that to rent a beach house in the Hamptons) and the founders won’t have to dilute themselves prematurely in order to raise the money they need to get their business off the ground. However, the founders of Company B will also face challenges, such as the need to pick up the phone and dial for dollars every time their company needs more cash to grow.
Here are three tips to raise the money you need to launch your business without giving up the store:
1. Do the math.
Figure out how much money you need to start your company and what you need to use it for. If you’re starting a kitchen-table business with no rent, employees or inventory, then you probably don’t need to predict how much revenue your business is going to generate next year or how much it’s going to cost you to make those sales. If, on the other hand, you have something more ambitious in mind–such as a restaurant, a fashion line or an internet company–then you’re going to have to put some serious money behind that idea. Whether that capital is coming from you, your family or an investor, you’ll need a road map to show you how you’re going to get to your destination, and how much time and money it’s going to take to get there. That road map is your business plan.
2. Get to know your investor.
Big money often means big strings attached. That’s why it’s important to know who your investor is and what he expects from your company. Is he an angel investor who’s willing to nurture your company as it grows or a high-powered venture capitalist looking for a 35 percent-a-year ROI? Is your investor willing to let you run the show or does he have a management team waiting in the wings? Either way, it’s all about setting expectations and meeting them.
3. Shop it around.
As I always say, a little competition makes everybody better. That’s why it makes sense to meet with angels, VCs and other potential funding sources before you seal the deal. No matter how great that term sheet looks or how long you’ve been out there pitching, you need to make sure that the terms are a win for you as an entrepreneur and that your relationship with your investor will not simply be a marriage of convenience. Dilution, voting rights, registration rights and liquidiation preferences are just a few of the many terms you’ll need to get comfortable with before you sign on the dotted line.
No matter what your friends and colleagues may tell you, there’s no one-size-fits-all investor deal that works for every startup. Take the time to do your homework and strike the deal that’s best for you.
This entry was posted on Saturday, July 19th, 2008 at 10:11 am and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.Leave a Reply
