Anyone worked w/VC or Angel investors to start a business?
- Thread starter Cuddles
- Start date
It is in large part the person who is bought, the ability to implement the idea is what is looked for.
You will get to keep very little of the business yourself for just an idea unless a humdinger. Some people will make anything work most will not.
You will get to keep very little of the business yourself for just an idea unless a humdinger. Some people will make anything work most will not.
My first company was funded. Luckily I was able to make enough from that to own all of my current company, so careful what you wish for when it comes to VC money.
The first key which may not be obvious is that you have to have an addressable market big enough that your firm, if everything went right, could be worth at least several hundred million. The VC model is to buy a bunch of OTM calls at a very low price expecting most to expire worthless (startup fails), a handful to basically break even, and 2 or 3 to become unicorns and cover all the other call premiums with a bunch of profit to spare. This model doesn't work if your company is only worth $50M even if you hit it out of the park. Even if you've got a great business that has a far higher chance of being worth $50M than any of their current portfolio companies have of making it to next year. In fact, they counterintuitively prefer that the failures fail early so they don't have to waste time with them. They actually call an otherwise successful company that only grows to say the $50M mark a "Zombie" because it won't die but sucks up their time sitting on the board and trying to grow it. Of course if you own all or most of a $50M company you're pretty damn happy about it!
If you meet the addressable market screen it's all about fortune favors the brave. You've got to network your way around your industry like nobody's business until eventually you run into someone who knows someone who puts you in touch with someone else who loves your idea and your team. As probably goes without saying this is very hard and can take a long time. For it to work you definitely need something beyond an idea. Varies by industry, but for a service company or non-cash intensive product company you need a product and real live customers as well as full time employees including you.
I highly suggest taking a look at the incubator concept. They're pretty much everywhere and will force some rigor on you as well as throwing you in with other entrepreneurs to help you get and maintain the unique mindset you need in startup phase. Plus they jumpstart the network if you don't already have one from your previous work experience or your school.
DONT DO THIS. Things you need to know: If your business plan is good anyone that is willing to invest in it would rather just steal it and let one of their friends do it. The ONLY time they will invest in your business is if you have outstanding experience and education AND you have given them an insane portion of the shares to the point they say "fuck my friends, I'm going with this guy". A second possibility is they might try to possess you. If you insist on doing it anyway make sure your business is located in a region of the country where the VC does not live and has no interest in visiting.
I have a pretty long background both in starting up tech companies and working as a VC spending others money (other bigger VCs, institutions, government money)
Its a pretty big topic. Essentially traction is the key metric in the early stages. This has to feed into a growth plan that is more attractive is you have a repeatable sales process. This is pretty much the same across most industries except where you would look to leverage user numbers against an advertising revenue. HOWEVER, companies that choose that route of building subscribers to then sell their eyeballs, are always the first to get hammered and shuttered when recession hits, or things go bad. PM me for a chat if you want to know more or how VCs look at investing in companies. @Slartibartfast summed it up in saying they really are buying the founder. Its a bit of a minefield alone trying not to get barved out of your own equity when raising money fast. Lots of bear traps out there. Just focus on making cash, building users, building traction and sweating the profits back into the business. One day, you will have something considerable and you wont have to talk to VCs but Private equity guys instead. Family offices are also another great way to get financing. They are less demanding in terms of turning their investment over in a set timecycle. I wrote a 10 key steps once on my twitter. Could dig it up for you. @timdug
Its a pretty big topic. Essentially traction is the key metric in the early stages. This has to feed into a growth plan that is more attractive is you have a repeatable sales process. This is pretty much the same across most industries except where you would look to leverage user numbers against an advertising revenue. HOWEVER, companies that choose that route of building subscribers to then sell their eyeballs, are always the first to get hammered and shuttered when recession hits, or things go bad. PM me for a chat if you want to know more or how VCs look at investing in companies. @Slartibartfast summed it up in saying they really are buying the founder. Its a bit of a minefield alone trying not to get barved out of your own equity when raising money fast. Lots of bear traps out there. Just focus on making cash, building users, building traction and sweating the profits back into the business. One day, you will have something considerable and you wont have to talk to VCs but Private equity guys instead. Family offices are also another great way to get financing. They are less demanding in terms of turning their investment over in a set timecycle. I wrote a 10 key steps once on my twitter. Could dig it up for you. @timdug
After their companies went public both Bill Gates and Jeff Bezos were left with 16%.
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Most entrepreneurs understand that 16% of what eventually becomes a multi-billion or in Bezos case a trillion dollar enterprise is worth far more than 100% of a multi-million or zero dollar enterprise. That said it's important to know what type of company you're starting, what your addressable market size is, and what your most probable route is. If you're in a type of industry where your company will either dominate a $100M+ market or fail somewhat rapidly you are far better off taking VC money because it moves you toward the left side of that equation and even 16% equity is a big chunk of change if you succeed. If you're in a niche market where a steady state few or several million a year in profit is a likely outcome, you're better off without VC money. My first company was/is the former and my current is the latter; I took funding for my first and self-funded my current (helped of course by the exit from the first). Also keep in mind that some companies, like Amazon, are simply capital intensive and you aren't going to get to scale ever without outside funding. Its just the cost of doing business, even billionaires get outside funding.
As an aside, although you may end up with 15% equity at the point of an IPO, you typically only give up 20-30% of your equity in your first round. No-one gives up 85% in a first round!
Solid advice and I would agree given my personal experience also. Just to make sure readers are CRYSTAL clear on ‘Addressable market’ as this is very important. People pitching for money need to 100% know the difference between TAM- total addressable market and SAM- serviceale available market. These are best th different from the GM- global market. Too many entrepreneurs start off pitches with stats on the global market size in x billion dollars- aiming to capture 0.5%. These figures are total fairy tale bullshit- and not only that- they show the entrepreneur has not dived deep on what their hyper specific immediate market place size is and how they are exactly going to execute on marketing to it.
Some of the best things to show investors if VC, PE, family money are
1: what’s the SAM
2: what’s your sales process? Including cycle times and how ou can streamline or even automate this?
3: what’s the cash do for the growth of the company in the first 3 months, 6 months, 12 months, 24 months. Investors putting in 250k don’t really believe their capital will be the cash that still keeps the lights on in 12 months.
4: can I work with this person. Do they have a record of delivering?
It’s really such a big topic. But finding investment if a game of kissing a lot of frogs. So get out there.the no.1 thing I learned from raising early stage capital Was that if you have not got an answer from the investor within 3 meetings then you shouldn’t schedule a 4th meeting unless it’s to collect a check or sign a full investment agreement. No exceptions.
If an investor has all the forward looking numbers and a slide deck and you and your teams cvs, he doesn’t need 4 meetings to make a decision- normally only 1 to 2.
,
Some of the best things to show investors if VC, PE, family money are
1: what’s the SAM
2: what’s your sales process? Including cycle times and how ou can streamline or even automate this?
3: what’s the cash do for the growth of the company in the first 3 months, 6 months, 12 months, 24 months. Investors putting in 250k don’t really believe their capital will be the cash that still keeps the lights on in 12 months.
4: can I work with this person. Do they have a record of delivering?
It’s really such a big topic. But finding investment if a game of kissing a lot of frogs. So get out there.the no.1 thing I learned from raising early stage capital Was that if you have not got an answer from the investor within 3 meetings then you shouldn’t schedule a 4th meeting unless it’s to collect a check or sign a full investment agreement. No exceptions.
If an investor has all the forward looking numbers and a slide deck and you and your teams cvs, he doesn’t need 4 meetings to make a decision- normally only 1 to 2.
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