Fund Raising 101

December 19, 2005

Looking back, I realize how little I really knew about fund raising when I started Aucland. It seemed to me all you had to do was write an amazing business plan, send it to a VC, organize a management presentation, do a brilliant job and all your problems were going to be solved. How little did I know 🙂

There were two fundamentally flawed issues with this: timing and approach.

a. Timing

When you create a new business from scratch, you face two main types of risk: idea risk and execution risk. Idea risk is the risk that the business you enter is not attractive and ends up not working for whatever reason (market too small, bad business model, etc.). You can minimize that risk by applying the 9 business selection criteria previously mentioned and/or copying an already successful idea from abroad. Execution risk is the risk that you are not able to execute and take the business from an idea to a functional product that can generate revenues.

I have come to realize that VCs are willing to accept idea risk much more than execution risk. Approaching a VC when you only have a business plan is a bad idea. The risk in your project is so large that you are unlikely to get a valuation above $1 million pre-money – if you can get funding at all. Moreover, if the VCs like the idea, they will immediately start looking around to see if there is another company in the space that might further ahead that they could fund. That said don’t worry about the VC stealing your idea and building the company – they are too busy being VCs to do that 🙂

If you wait until you have a functioning product and a proof of concept – even on a small scale – you will have proven that you can execute and that your go to market strategy has some merit and you will then find VCs to be much more responsive and valuations much more attractive.

Side note: Most entrepreneurs think that the largest risk they face is competition – they typically overestimate the competitive threat and completely underestimate the execution risk.

b. Approach:

Now that you have a functioning site it’s time to start contacting VCs to obtain the funding you need to accelerate your growth. Sending a VC a 50 page business plan and hoping to get a reply is not a realistic approach. VCs receive thousands of business plans a year, but between the companies they are on the board of, companies they are negotiating with and companies they are just talking to, they have very little time and will not read a 50 page business plan.

Prepare a 9 slide presentation with:

    1. Cover page
    2. The concept
    3. The market
    4. Your specific implementation
    5. Your differentiation
    6. Your team
    7. Your projected financials
    8. Your capital needs
    9. Closing page with contact information

Now that you have your teaser presentation ready you must contact the VC. E-mailing it to businessplans@vc_name.com is unlikely to work as that e-mail address is flooded with thousands of ideas and projects and your presentation is likely to get lost in the clutter.

The best way to approach a VC is through someone they know and to organize a brief voice conversation. Work your network – between your classmates, co-workers at all the companies you have worked at, family and friends someone must know a VC that invests in the field you in (or a VC in any field who might be able to point you to VCs in your industry if need be). Have your contact send an introduction e-mail. Reply, thank your friend for the introduction and express interest in having a brief conversation. The VC will usually reply accepting to talk, asking for the Powerpoint or telling you if your project is out of scope for his firm. If the VC does not reply within a week call him — if he is in a meeting or traveling ask his assistant when he will be free and call again. As with many endeavors in life, persistence usually works 🙂

Conclusion:

The earliest capital is the most difficult and expensive to raise – and you are extremely unlikely to get it from a VC. Do whatever it takes to get the project off the ground without it. If you don’t have enough personal money to fund the early stage development you can:

  • Beg friends and family for money
  • Don’t pay yourself
  • Beg your developer friends to build the software for you
  • Give sweat equity to whomever you need in the early stages of the company
  • Penny pinch on everything – you most likely don’t need a CFO, nice offices, etc. Just get the product out of the door!

Once your product is out of the door, test your go to market strategy on a limited scale – for instance $10k in Google Adwords advertising — until you can show your model works, then use your connections to approach a VC and raise the money you need.

Good luck!

Side note: The above is somewhat specific to consumer facing ideas. For a softeware company selling to coropoates, the model can be a bit different as you can get an early customer to pay you to develop your product and then use VC money to scale the company…

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