5 Things I Learned in Raising Investment Money

You guys know that I’ve always advocated bootstrapping.

I will ALWAYS advocate bootstrapping as the way to go. But when someone asks me if she should raise money though, I never ever blurt out a “you should always bootstrap first.”

The real (sometimes frustrating) answer is of course, “it depends.”

It depends on whether your idea needs a lot of capital to begin with. It depends on the market. It depends on how defensible your position is to new entrants. It depends on your market adaptability rate.

Sometimes, it also depends on where you want to take your startup.

Our first bootstrapped startup, STORM, became profitable on around its 3rd year, then it just grew pretty fast during the next 4 years, all organically.

Then, my business partner Pao and I saw a new business opportunity for STORM, a new strategy dripping with potential, but one which  required a sizeable capital investment – a bit more than what the company could afford using its own funds.

So Pao and I talked about it. We came up with two initial plans:

Plan A: Go on our current organic trajectory (which wasn’t bad)

or

Plan B: Go for the new strategy by raising money and sacrificing equity.

Being the entrepreneurs that we were, of course we went for Plan B. BUT, we said that if we didn’t like the terms, or if we didn’t feel fully confident with the would-be investor, then we would do a Plan C and try to make it work ourselves. (nope, plan A was never considered)

So around a month ago, we began the process of raising money for our company. It was our second time to do so.

The very first time we tried raising money was back in 2004 when we started STORM. We failed to raise a centavo and resorted to try doing it ourselves (which in retrospect, was a blessing).

Around a week ago, we got the verbal go for a substantial sum – exactly what we needed to shore up operations in line with our new strategy.  More than that, we partnered with a great investor whom we felt could help us take the company to the next level.

Here’s what I learned from the whole process:

1) Traction Reigns Supreme

Traction can be defined as the startup’s history of actually making money. Which, you know, is what companies are supposed to do.

Traction means everything on the entrepreneur-investor negotiation table. Without traction, the negotiating power of the entrepreneur falls considerably.

The best asset any negotiator has in any negotiation process is the ability to walk away from the deal. Traction gives the entrepreneur the much-needed leverage to say no and find the best deal available. When we did our pitches to investors, we were able to show them 5 years of increasing profitability and a host of longterm relationships with substantial clients. We had no problem finding people interested in investing, our problem then became choosing who to partner with.

This is a much better problem than the former.

2) The Founding Team Counts

We’ve always heard investors say, “we bet on the jockey, not the horse.”

This is true. Investors will not merely give their time and money to anyone with a grand idea. The idea is secondary. Who the entrepreneur is is primary.

So you can bet investors will do their due diligence with you. They will check with their network for references. They will look at your past work. They will schedule multiple meetings with you to ascertain comfortability and working style.

In a very real way, the process is much like job-hunting. You and your founder team will need to be impressive.

3) Cast a Wide Net

I can’t think of any reason why your startup should not let as many people as possible know that it is raising money. Again this process is like recruitment. In recruitment, if you want to be able to get the BEST PERSON possible, you cast a wide net and consider as many qualified people as possible.

During the STORM process, we talked to VC’s, angels, friends, family, and went deep into our network for other connections. We presented in PhilVenCap (they meet in AIM every third Thursday of the month), posted on startup-related FB groups, talked to high net worth friends abroad, and told everyone we thought MIGHT be helpful that we were raising money.

The result? We were able to pool a relatively large number of investors of different backgrounds and strengths and get them to be interested with our cause. We also learned a lot, got a large number of useful contacts, and even potential clients. Oh, and in the end, we were also able to partner with someone whom we thought fit our needs to a T.

4) Look for Much More Than The Capital

Essentially, looking for an investor means looking for another founder. It’s important to remember this and not be consumed solely on raising the fund.

I’ve done numerous posts in this blog on why and how founder recruitment is crucial to the success of a startup. Partnering with the wrong investor can very easily doom your startup.

You HAVE to look at what the investor brings to the table. Will the investor be a meddlesome sort who will want to monthly reports and meetings (this can be CRIPPLING for a startup for the sole reason that these meetings end up being a distraction more than anything). Or on the other hand, will the investor just give you the money and contribute nothing else to the cause? A good investor choice is someone who will be there when you need her and not be there when you don’t need her.

Aside from the money, you have got to consider how else will a potential investor help grow the pie. This was the clincher with our own process in STORM. The investor we partnered with had much more to offer than just the funding.

When choosing an investor, you ALSO have to require multiple meetings to properly ascertain comfortability and fit.  Moreover, observe carefully at how interested the investor is with the business concept, NOT MERELY the ROI potential. This is crucial. If the investor is genuinely interested in the business concept (she comes up with new ideas, she gets palpably excited talking to you about the idea), then thats a good sign she will render real support when you need it.

5) Have a Plan, Then Execute Fast

Remember, the most important element a startup needs is not money, but TIME. (when you think about it, the money usually just pays for the time).

I can see how fundraising can prove to be quite the distraction, especially since you are talking about money and essentially selling kool-aid about how great your company is. It can be tempting to try and extend the process to try to see if you can get a better deal than what you have. An investor can also lengthen the process by dangling more money in return for a bigger pie piece. All this results in one thing: less time for your startup.

You have to be very clear on how much money you will need, how much equity you are ready to sacrifice, and who you are looking for in an investor. Then cast a wide net, talk to as many people as possible and then decide fast so you can go back to working on your startup.

Comments

  1. Another biggie, I think, is knowing the primary motive for investing. It made a huge difference to me that the investor was in it to grow the company and STICK with it. Not go for an exit x years after with y return.

    • Yeah, I think we were pretty blessed with how things played out.

      That’s one thing an entrepreneur and an investor will usually butt heads with – the entrepreneur will fall in love with the idea and would want to see it through, while an investor will usually (and justifiably) want to flip the investment as fast as he can.

  2. The best startup investors are those that buy into your business model, have confidence in you to execute that business model, and can provide advice or contacts when needed — but otherwise stay out of your way.

  3. I just remember when Mark Zuckerberg and his co-founder were looking for an investor for their Facebook.com website at the movie “Social Network”. Sean Parker’s experience is a more valuable asset than the money he put in, according to the movie.

    • Agree completely. the best angels offer so much more than the money.

      In the movie, it was parker who advised them to resist the easy ad money and focus on growing the community. (and eliminate “the” from their url)

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: