Those of you who have read my columns over the years know I am intimately involved in helping start-ups and early stage companies succeed. A significant part of this assistance relates to helping companies secure funding. I typically write more than 100 business plans a year, along with many PPMs (private placement memoranda), executive summaries, decks (slide presentations), financial models, marketing plans, etc.
All of these documents serve a specific purpose within the framework of the funding process. However, even with the most effective documents possible, securing funding can be a daunting task for entrepreneurs. The following is an outline of my personal experiences during the funding process and my recommendations for entrepreneurs seeking funding.
There are hundreds of angel investor groups throughout the United States and around the world. While it is true that many entrepreneurs have secured funding from angel investors, in my personal experience they are a complete waste of time for the start-up and early stage business.
The reality is that angels want the business to exhibit a specific set of characteristics that, frankly, is impossible for all but a tiny percentage to have. In short, they want the business to already be a successful business generating revenue and positive cash flow, and then, they want a giant chunk of the equity to get involved. I will submit to you that if a company is already generating positive cash flow, it does not need angel money — there are plenty of other, less expensive sources of capital for a cash flow-positive business.
Not too long ago I worked with two celebrity entrepreneurs who had what I believed (and still believe) to be a potential highly successful business model. On my recommendation (which I regret), we attended an angel group’s “boot camp” — an all-day training session at which (so-called) experts “teach” entrepreneurs how to more effectively pitch their business concept to investors.
The cost of this boot camp was $500. The angel group implies that if entrepreneurs attend the boot camp they have a very good likelihood of being able to present to the group’s angel investors, who supposedly have significant cash available to invest in start-up and early stage businesses.
After attending the boot camp, my entrepreneurs were not allowed to present — which was highly disappointing to say the least, and embarrassing to me since I recommended that they spend the time and money to attend. This was a complete waste of our time.
More recently, another company I am currently working with presented to a local chapter of the largest angel group in the United States. Only five or six members bothered to show up, few asked questions, and none followed up with us after we presented. We never received any feedback from them — at all.
The funny thing is that, months later, after we secured approximately $600,000 in funding on our own, through our own sources, one of the representatives of this same angel group came to our offices to ask us how we succeeded in securing funding so they could help the companies they are working with secure funding. Huh? I thought they were supposed to be funding companies. In our experience, apparently not.
As fruitless as my experiences have been with angels, my experience with venture capital firms is even worse. While the angel groups were simply a waste of time, the VCs are singularly focused on raping entrepreneurs at every turn.
With the same company mentioned above, we were approached by a mezzanine financing VC out of Los Angeles. What followed, after wasting an entire day with their representative, and several more days of Q&A, was an offer that is a classic “Loan to Own” scenario in which the VC offers to lend the company money under terms so egregious that it would be virtually impossible for the company to meet those terms. Included in the terms is a clause that, in short, states that in the event that the company does not perform, the VC takes ownership of the assets of the company. Again, this kind of scenario is a complete waste of the entrepreneur’s time, money and effort.
What’s An Entrepreneur to Do?
While there is no single best way for an entrepreneur to raise the funding needed to build a successful company, there are some useful tips I can provide, based on my personal experience. First, your first and best source of capital is you. If you believe in your business model, you must be willing to invest your personal assets in the endeavor. If you don’t believe in the concept enough to risk your own money, stop now and walk away.
Family and friends are the next best source of capital. You will spend far less time and effort convincing people you know and who know and trust you to invest in your business than you will need to invest to convince strangers. More important, you will need to give them far less equity in the business than angels or VCs. The equity you sell at the earliest stages of company development will almost always be the most expensive you sell, so to the extent you can minimize the amount of equity you must sell early on by selling it to family and friends, the stronger your position will be when you undertake a future round of funding (which you will almost always need).
Maintaining the lowest possible operating overhead early on, as you are raising money though a family-and-friends round, can allow you more time to build the company to at least revenue generation and, hopefully, positive cash flow. The further you get with family-and-friends money before needing to approach other investors, the stronger will be your position, and the less equity you will need to sell to secure the next round of funding. Also the easier and faster you will secure that next round of funding as it is far easier to raise money when you are cash flow-positive.
For those who do not have their own funds, and do not have family and friends they can tap, you may be forced to approach angels and VCs. If this is your reality, be prepared for it to take a long time, cost you a lot of money, be very frustrating, and to ultimately require you to sell a very significant portion of your company. It is certainly possible for companies to secure funding in this way, but in my personal experience, for the vast majority of entrepreneurs, it’s a waste of time, money and effort.