I get approached often by tech startups looking for their first outside funding. They come in lots of different flavors and stages of fundability. Most are making major mistakes in their approach when seeking capital. Remember, this is a professional process you are conducting with legal and financial processes.
One of the easiest mistake to fix is timing.
In their quest for sustainable growth, the elusive dream for most first time founders is that first funding. The idea of outsiders entrusting them with a million dollars to spend is intoxicating. This article is based on my experiences and the typical mistakes I see every week in startup land.
High growth startup companies need seed money to get things going. Without funding most tech startups will die. This can either come from the founder(s) own bank account or from outside investors.
They need the money to rent offices, hire staff, and establish their initial presence (website, incorporation, marketing). Most important is that they need to grow into a real company quickly.
The last point above is important — high growth. Without seed funding most startups seeking high growth won’t make it. They need too much capital to keep pace with the market and their competitors. Capital = Growth.
When launching your company there are 2 times to raise your outside seed funding, and one time window to avoid.
Option One: Before you launch — when you are just starting, probably no product or service yet.
Option Two: Once your product or service is up and running and gaining traction. In between those times it’s pretty tough.
If you’ve already soft launched, have a product available, are telling the world about your awesome company but don’t have revenue/user growth, you’re probably in the red zone. This is not a good time to ask for outside funding.
Option Three: Or don’t raise funding. If you’re bootstrapping, you don’t need to worry about either of these options. Your strategy is to create growth with little or no money. There are several great examples of technology startups that do this. Most grow more slowly, but the longer term growth curve can be pretty impressive. They also have the enviable lifestyle of no outside investors.
This article focuses on the first two options…
Option One: Raise before you launch (Pre-Launch)
If you take this approach, you need to have built a relationship with the potential investor — a cold inquiry (a common mistake) hardly ever works and you can ruin your first impression to investors. The “idea” must be well thought out, there needs to be a team or potential team, the presentation needs to be very good, confidence must be high.
At this stage you’re essentially selling yourself and your cofounders. You are being judged on your resume, trust and the excitement you can build. That’s why much early stage funding is “Friends and Family”; your friends and family naturally overrate you and/or can’t say no.
Also, people who know you from your career are great sources, if they have had success or other positive relationships with you in the past, and want to work with you in the future. They’re betting on you.
Pre-launch funding is pretty common in Silicon Valley, but that’s a unique case. There are so many Facebook/Google/Apple multi-millionaires who receive new stock options every quarter, often a few hundred thousand dollars every quarter, that feel they should put something back into the system, plus they like the idea of being an investor.
Statistically they usually lose their investment, but that’s o.k., it’s one step closer the the next winner. They risk money they can afford to lose. They are comfortable with “risk investing” more so than anywhere else in the world.
But to get that Silicon Valley angel funding you have to be part of that social network; most of the rest of the world doesn’t have that frothy environment.
Option Two: Post-Launch — Raise when you start getting traction
To me, this is the best time to raise your seed. You’re less vulnerable, pay less equity for your funding, and you have some very specific things to talk about.
PreCog Security, a company I am currently helping to build as cofounder, is taking this approach. As we prepare for our first funding we are assembling a value chain from partners and vendors to clients. Every day it gets a little better and our brand name gets a little more well known.
So far we have no office, minimal travel and other cost cutting, but we are slowly getting stronger and our outside funding needs are getting more strategic. And we will have plenty to talk about when we sit in front of potential investors.
When you delay your raise until post-launch it’s harder to get that early stage super-growth that’s required in some niches and you don’t have the good type of scrutiny from outsiders analyzing your moves. But you also don’t get the bad type of scrutiny, especially from friends and family.
You have the freedom to build your foundation and make very quick decisions. Also, if you can build a nice little group of advisors and partners you will have the added momentum from all those people as well as some potential future employees.
In summary, which is best for you depends on your skills, what you’re building and your own tolerance for no income. Whichever you choose, keep your eye on the goal, believe in yourself and your team, read a lot of inspiring articles and drink lots of coffee. Good hunting.
This article is an excerpt from an upcoming book about Startup CEOs by the author.
This article is a quick note to answer the many inquiries I get about finding the perfect cofounder.
Over the past few weeks I’ve been casually looking for someone to work with, to develop and market a suite of mobile applications (iOS, Android) for the entertainment world. I’m describing this other person variously as a cofounder, partner, CTO, and collaborator.
The focus has been on someone with the right combination of technical experience/excellence, mutual chemistry, plus the right timing and inclination in their lives to do this.
I’ve asked around, talked to friends and even put a little ad in craigslist in Los Angeles. Through all this there have been many responses, some very positive, and some pretty weird. I realized what I’m doing is inadvertently conducting a social experiment here.
The explosion of mobile phones and mobile apps has created an almost visceral response when you mention mobile, or Droid, or especially iPhone, or iPad. Everyone wants to have a connection with it, whip out their smartphone, show you their aquarium screen saver.
You either have one or wish you did. When I was a child, it was having the newest Schwinn bike, in a cool color. $37.95. Or the latest hot record album. You either had them or wished you did.
Now it’s another computer device that you can carry with you, is “always on”, and can do almost everything (and plays the latest hot album). Suddenly waiting in line somewhere you can instantly become productive if you want, or play a game.
If you carry this one step further – actually being involved in developing and deploying mobile apps, it’s even more compelling. A higher level way to become part of the society and possibly make some money.
COFOUNDER FOCUS
The focus should be more on the functionality or enjoyment or how you’re improving the world, but it’s not – it’s more the idea of being part of this new baby-app world. The result is many apps and businesses that come and go quickly.
Over 2,200,000 iOS apps are deployed plus equal amounts of Android and others. Most are unused or have a short lifespan and very little revenue. It’s more of a hobby or personal challenge than a scalable business.
In looking for a co
founder, I’m searching for the combination that will allow us to build a long term growth company, scalable and adaptable over several years. I want to create long term jobs and products people will use. That’s not the sentiment of most CTO-types I talk to. They want Cash Now, to be paid for their work by the hour/project.
KEEP LOOKING
I see the economy has changed the focus to short term survival, not entrepreneurship (except in Silicon Valley). People believe they can learn app dev in 3-6 months and then create their own long term income, and they’re right on the mark in many cases.
Aside from revenue generation, mobile apps are needed for basic business existence in most areas. Almost all companies are retooling their public image while also increasing their ability to market real-time. The mobile phone/pad is becoming central to our lives, more than our computer in many cases.
I’m going to keep looking for a cofounder. I’ve been lucky enough to create a few new products in this world that stick, which creates the backbone of scalability, I’m having more fun in this new domains than ever before. If you know anyone, send them my way. @tomnora @cowlow
[This article is based on some assumptions: you have a business worth funding; you have the motivation that inspires investment; that you have access to a “reasonable” pool of funding.]
About 4 years ago, a good friend of mine asked me to help her figure out if and how she could raise some funding for her business. She didn’t have a “tech startup” per say, rather she was a UX/UI designer, and a very good one.
She wanted to raise money because she was starting to hire people under her as contractors to help her with her workload, which was designing graphics and interfaces for startups in San Francisco. The company has nice revenue growth, some proprietary software tools (CSS, Javascript) and a bit of cash in the bank. This is not a vanity business.
I said “Sure, that could be fundable. How much are you raising?” She just gave me a puzzled look.
People wonder if it was pretentious to assume a design firm could be fundable. I tell them absolutely not – if gourmet coffee is fundable, then of course digital design was and can be a fundable, scalable, “productizable” business. The real question: Is it scalable? If is that what you want – a bigger company? Investors? why? are you ready???
Those questions caused her to go away for a few months; that happens a lot when I ask questions. She eventually came back with some great answers to my questions. My only feedback was to double the ask; ask for twice the amount she felt she needed. That kind of shocked her again. Good.
Why ask for more? So many reasons. Costs are hardly ever lower than you estimate. It’s never good to run out of money, as we all know. Also, real investors know when you’re not estimating your costs correctly and that turns them off. Believe in yourself.
Often fundable founders don’t agree with me on this point. They say…
I don’t want to give up more equity
I can do it with less
Investors will say “no” if I ask for too much.
And here are my responses:
Fight for a higher valuation, use outside experts
Over estimate all costs
Be bold
If you wait until you’re running out of money it will cost you more. Also, you can possibly sell a little bit of your own stock to investors, give yourself a six figure bonus.
Im my book HACKING THE CORE, I write about using Creativity and Innovation to help startup founders achieve that elusive goal – sustainable business growth, along with a few other things like profitability, a fun place to work, personal fulfillment.
That’s an oversimplification, but the idea is to expand your horizons, “think different” to enhance your chances for success as well as personal fulfillment along the way.
Innovate. Be creative. Discover something no one else has. Go where they’re not.
The book also talks about Wantrepreneurs and Cantrepreneurs. In my consulting work I can identify these types of people. They’re usually struggling, losing their company, walking backward towards the edge of a cliff, failing daily. Yet they’re unwilling to change their thinking.
Creativity and innovation don’t actually make sense to them in a practical application because it threatens their status quo. Deep down, change is bad to them.
Their brains are wired to do things their way – no matter what. Usually their way is to mimic someone else’s or their own successful tactics from the past. Crazy, right?
Every entrepreneur wants to innovate but some just can’t. Even in the face of doom and bankruptcy they can’t change. Another type of cantrepreneur.
They ask for help but only to help them do things their old way, and not to bring new innovation to the problem.
Why? Because that’s a threat to their self image, their power, their reputation as being the authority. Their position as the boss.
There are other people who are totally open to change, reinvention, pivoting, innovating, threatening their own beliefs, listening to others. These are the real entrepreneurs. They’re happy to be wrong. They have much better odds for success.
Here’s the intro on iBooks, Amazon and other online sites for my new book, released in April 2017.
– – – – –
Hacking The Core explains entrepreneurship in the tech startup world in a refreshing way. Pulling no punches, the author draws from 2 decades of experience as a startup CEO, strategist, M&A consultant and investor.
The book explains how to tap into the creativity and innovation that we all have hidden inside of us and how to apply it to launching and growing a startup business. It looks at all areas of a business launch to uncover areas of innovation, differentiation, design thinking.
Hacking The Core is based on principles of common sense, honesty vs. “fake it ’til you make it” and humility in success. It will show you how to lead instead of follow trends, how to create true disruption in and market segment.
There are several personal anecdotes from the author and explanations of his own motivations and mentors in his long startup business path.
Tom Nora is an entrepreneur, startup CEO, blogger and business mentor. He has led and mentored over 2 dozen venture-backed technology companies, 5 of them as President and CEO. He has extensive experience in funding, mergers, acquisitions and IPOs.
In 2011 Tom launched The Scalable Startup in Santa Monica, California to help tech startups launch and grow by providing mentoring, funding, community and strategy consulting. The same year Tom also started publishing the popular blog The Startup CEO.
In 2014 he decided to write a series of books on the startup world and his experiences. This was in response to the continuous requests for help he receives from early stage entrepreneurs and future entrepreneurs. Hacking The Core is the first of these books to be published, focusing on innovation and originality.
Tom is also a lifelong fine art photographer and oil painter.
