Friday, August 27, 2010

How Not To Raise Money

I don't know a lot about raising money from professional investors, at least not yet. No one should listen to anything I say about how to get an investor to write a big ol' check. I do know a ton about how NOT to raise money!

Even the most stellar idea does not equal money. No rational person is going to invest money in an idea alone. When you get your first flash of brilliance and realize you're sitting on a bajillion dollar idea, that is not the time to raise money. I spent almost a year working on my "perfect investor presentation" and giving pitches to early stage investors before I realized it was too soon to ask for money. Asking someone to fund an idea is worth about as much as a map to a pirate's buried treasure scribbled in pink crayon on a grease-stained napkin from McDonald's. Don't believe me? Try selling an idea on eBay.

Don't ask for money until you've got some ground under your feet. Traction is pretty much required. Your business should be growing and preferably making money. There is tremendous value is being able to show someone that you're offering a product or service people care about. Even established entrepreneurs need to have traction before attracting investment. Elon Musk spent millions of his dollars on Tesla before raising money because he couldn't prove there would be a market for electric cars. Tony Hsieh spent almost everything he had to keep Zappos afloat until he could prove that selling shoes over the Internet was a good idea (I recommend reading Tony's book Delivering Happiness). Evan Williams spent a few million on Twitter before raising any outside capital.

To not raise money, you need to try doing it by yourself. In order to attract investment, the company must be bigger than one person. It doesn't really matter if you are a single founder with a few key employees or co-founders dividing up the responsibilities; an investor wants to see relationships that can endure stress, have complimentary skill sets, and work well together. One person needs to be the clear leader, and the team needs to have a process for making decisions with less than perfect information.

To not raise money, talk to the wrong investors. You should find an investor who likes either the industry you serve, your business model, or the stage of your company. You don't even need to have a pitch yet. At a recent SVASE event, I asked JJ Freitag of Azure Capital a very specific question - "Would an early stage technology enabled recruiting service possibly be a business you could invest in?" He informed me that Azure is willing to explore technology enabled services earning at least $100K/month. During that same event, I also asked an investor from Claremont Creek Ventures if he liked the Captain Recruiter business model; he informed me that he focuses on specific industries like the energy sector and would not be interested in my business.

Investors want to put money in and get money out. If you have an awesome business that no one else would ever buy, no investor will put money into it. You need to show an ability to go public, get acquired, or at least pay dividends to the investors. My impression is that most investors are looking to get their money back in less than 10 years.

Raising money is hard - very hard - but not impossible. Get an idea. Get traction. Build up a rolodex of investors who like your business. Build a team. Focus on profits. By the time you can raise money, you might not even need it!

1 comment:

  1. Very true. I am based out of India running a startup (3-4 months old) - facing the same problem. You get an early stage investment if you probably belong to CXO's (or) a serial entrepreneur, else bootstrapping and getting funded by customers for the initial months/years is the right way to go I think.