VC Tips for Entrepreneurs: Thoughts About Raising Money
Posted by Pierre de la Fortune on January 27, 2015 @ 12:09 a.m.
Written by John Backus
Moment #1: Napkin Stage. Unless you are a proven entrepreneur, with a track record, an obviously good idea, and existing connections to investors, this moment is VERY HARD to raise money. Keep your day job. Work on your business in your off hours. Use your savings. Borrow from friends and family. But by all means, move your business beyond the napkin stage before you ask someone you don’t know for money. For an internet business, with cloud computing and storage, ruby and rails, there is no excuse for not at least having a live prototype of your business before you seek outside money. And by all means, please don’t approach investors at this stage and tell them that you will leave your high paying job and pursue this new business IF the investors will fund you. We want you to take some risk in starting the business!
Moment #2: Working Product Stage. This comes after the napkin stage. Now, you have built your product and it works, although it is probably quirky, incomplete and not quite perfect. You have some people who are using the product, but who are probably not paying for it. It is a new idea. Perhaps a revolutionary idea. No one else is doing it. And it works. This moment in time, with great enthusiasm from you, is a great time to raise money. Your expenses are low so you don’t have a big burn to cover. You don’t need the money to cover big expenses. But you want the money to grow your business. You are selling a vision. Hope. A big idea. All based on good early traction. We get most excited about deals here, at this stage, when the market opportunity looks unbounded, the product works, and there is early customer traction in the market. Even in the dark investing days of 2009, we lost out on several deals that looked like this, which had competing term sheets, when we backed out of an auction-like process. This is a great moment in time for entrepreneurs to raise money, whether as a seed round or an “A” round, from Angels or VCs.
Moment #3: You have a Business Stage. At this moment in time, your product has probably been live for 6, 12 or 18 months. You have raised your angel money or “A” round money. You have assembled a team. And you have results. At this moment, your ease of raising money is Dickensian – as in A Tale of Two Cities. “It was the best of times, it was the worst of times.” If your business is developing better than you expected – growing customer base, increasing revenue, decreasing net monthly burn – then your fundraising task is an easy one. Everyone want to invest in a perceived winner. As an entrepreneur, you have the power here, and can often negotiate very favorable investment terms. One simple piece of advice. If you have TWO offers of financing, the terms you end up with will be MUCH better than if you take the first offer, or only have one offer. However. If your business is doing “OK,” but not hitting on all cylinders, (and most businesses end up in this category) then this is the hardest time to raise money. I call it the “valley of disillusionment.” You have built up a team so your cash burn has increased. You have a product that works. But odds are that you don’t have as many customers as you had hoped. Or they are not engaged with your product as you had hoped. Or they are not paying you what you had hoped. While this is a normal stage in most companies, from an investor’s perspective, you have a troubled situation. Things aren’t quite working right. And we don’t want to invest in a company that is struggling. At this point, your best financing option is asking your current investors for more money.
Moment #4: Revenue, Earnings & Growth. Congratulations. You have made it to the point where you have a real business. That is the good news. You can raise money pretty easily to grow a profitable business. There is one downside though. And that is valuation. Now, your business is less likely to be valued on its unbounded potential. Instead, you will be valued on traditional financial metrics. P/E ratios. EBITDA multiples. Revenue growth rates. Raising money is hard. Don’t make it harder. Raise money when you can, not when you have to!
About John Backus: He is a seasoned technology investor and entrepreneur with 25+ years of experience investing in and managing rapidly growing, high-technology companies. Prior to founding New Atlantic Ventures in 1998, John was a founding investor and the President and Chief Executive Officer of InteliData Technologies, a Fast 50 growth company in both 1997 & 1998. John led InteliData’s predecessor, US Order, through a successful $65 million IPO in 1995. John currently manages a $225 million venture portfolio at New Atlantic Ventures. He currently serves on the board of directors of AppTap, Invincea, Koofers, Healthwearhouse.com, My Wines Direct, & Qliance. He is the past Chairman of the Wolf Trap Foundation Board of Directors, the past Chairman of the Northern Virginia Technology Council (NVTC) Board of Directors, the founding Chairman and current Board member of the NVTC TechPAC, and was appointed by former Virginia Governor Mark Warner to co-chair the Virginia Research and Technology Advisory Commission which he served on for 4 years. John began his career at Bain & Co. and Bain Capital, where he was the first Bain & Co. management consultant to take a full time operating role (as CFO) in a portfolio company. For more info please visit: http://navfund.com/blog/author/john
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