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VC Tips for Entrepreneurs: Thoughts About Raising Money

Most entrepreneurs raise money to help their businesses get off the ground.  Whether from angels or venture capitalists, I see most entrepreneurs making the same mistake.  They raise money when they “have to.”  There is a better way.  With some advance planning, you can raise money, easier, at certain moments in time.  Take advantage of those moments and your fundraising will be much easier.  Raise money when you have to, and your task is harder than it needs to be.

“Between the idea and the reality.  Between the motion and the act.  Falls the shadow.” — T. S. Eliot

T. S. Eliot was not talking about venture capital when he wrote these words in 1925.  But I can think of no better advice today for entrepreneurs.

Raise money at the idea stage.  Raise money when you have a real business.  But don’t try to raise money in between.

Moment #1:  Napkin Stage.  Unless you are a proven entrepreneur, with a track record, an obviously good idea, and existing connections to investors, this moment is VERY HARD to raise money.  Keep your day job.  Work on your business in your off hours.  Use your savings.  Borrow from friends and family.  But by all means, move your business beyond the napkin stage before you ask someone you don’t know for money.  For an internet business, with cloud computing and storage, ruby and rails, there is no excuse for not at least having a live prototype of your business before you seek outside money.  And by all means, please don’t approach investors at this stage and tell them that you will leave your high paying job and pursue this new business IF the investors will fund you.  We want you to take some risk in starting the business!

Moment #2:  Working Product Stage.  This comes after the napkin stage.  Now, you have built your product and it works, although it is probably quirky, incomplete and not quite perfect.  You have some people who are using the product, but who are probably not paying for it.  It is a new idea.  Perhaps a revolutionary idea.  No one else is doing it.  And it works.  This moment in time, with great enthusiasm from you, is a great time to raise money.  Your expenses are low so you don’t have a big burn to cover.  You don’t need the money to cover big expenses.  But you want the money to grow your business.  You are selling a vision.  Hope.  A big idea.  All based on good early traction.  We get most excited about deals here, at this stage, when the market opportunity looks unbounded, the product works, and there is early customer traction in the market.  Even in the dark investing days of 2009, we lost out on several deals that looked like this, which had competing term sheets, when we backed out of an auction-like process.  This is a great moment in time for entrepreneurs to raise money, whether as a seed round or an “A” round, from Angels or VCs.

Moment #3:  You have a Business Stage.  At this moment in time, your product has probably been live for 6, 12 or 18 months.  You have raised your angel money or “A” round money.  You have assembled a team.  And you have results.  At this moment, your ease of raising money is Dickensian – as in A Tale of Two Cities.  “It was the best of times, it was the worst of times.”  If your business is developing better than you expected – growing customer base, increasing revenue, decreasing net monthly burn – then your fundraising task is an easy one.  Everyone want to invest in a perceived winner.  As an entrepreneur, you have the power here, and can often negotiate very favorable investment terms.  One simple piece of advice.  If you have TWO offers of financing, the terms you end up with will be MUCH better than if you take the first offer, or only have one offer.

However.  If your business is doing “OK,” but not hitting on all cylinders, (and most businesses end up in this category) then this is the hardest time to raise money.  I call it the “valley of disillusionment.”  You have built up a team so your cash burn has increased.  You have a product that works.  But odds are that you don’t have as many customers as you had hoped.  Or they are not engaged with your product as you had hoped.  Or they are not paying you what you had hoped.  While this is a normal stage in most companies, from an investor’s perspective, you have a troubled situation.  Things aren’t quite working right.  And we don’t want to invest in a company that is struggling.  At this point, your best financing option is asking your current investors for more money.

Moment #4:  Revenue, Earnings & Growth.  Congratulations.  You have made it to the point where you have a real business.  That is the good news.  You can raise money pretty easily to grow a profitable business.  There is one downside though.  And that is valuation.  Now, your business is less likely to be valued on its unbounded potential.  Instead, you will be valued on traditional financial metrics.  P/E ratios.  EBITDA multiples.  Revenue growth rates.

Raising money is hard.  Don’t make it harder.  Raise money when you can, not when you have to!