Some of the myths about raising money are all too familiar. “I just need to be introduced to the right person.” “I will put my idea on one of those crowdfunding platforms.” “Once my prototype is done, everyone will want to fund me.” Or, my favorite, “We will bootstrap with [students/interns/work for stock] people.”
Raising money for your startup is not the result of some elusive magical incarnation. It’s a step-by-step methodical process, just like any other business activity. Raising money is not complex, but it is a lot of work. Maybe that is why so many people cling to the myths.
VC invests in companies that, if scaled, will grow rapidly for an extended period of time and make a profit. They are not interested in theoretical businesses; they want to see proven businesses with customers and profits. It is not likely they will invest in an idea alone. Don’t waste time talking to VC unless you have raised seed funds (for information on how to raise seed fund see: How to Raise Money for Your Startup) and created a prototype business that can be scaled.
The VC round is more about execution than anything else, and this execution is very difficult. It is very easy to make the wrong decision. You are trying to disrupt a market that has been doing fine without you for a very long time. There will be many incumbents who will have every reason to see you fail. There will be no road map, as no one has ever gone down this path before.
Because most of the people you will meet work in this industry, or in another well-established industry, they will insist you should do XYZ because that is what works for them, which will be wrong because you’re a startup trying to disrupt an industry, not compete with one head on. In other words, everyone will try to steer you in the wrong direction, some out of ignorance and some because they want to maintain the status quo. No one is an expert–that is why it is a startup. In fact, experts should be cautiously approached. They are hammers, and to them, everything looks like a nail. Making good decisions will require a lot of courage to resist and defy the establishment. It is not that you should not listen to anyone, it’s just that you need to understand where everyone is coming from.
To be successful, you will need to become as iconoclastic as possible–that is, someone who can determine the true path even when others are certain it is the wrong path. Iconoclastic personalities are very rare. They are often social outcasts. As George Bernard Shaw said, “The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man.” So what does any of this have to do with raising money? Nothing, but it has everything to do with successfully executing in a startup. After landing your seed funding, you have one chance to get this execution right. Execute, and you will get a VC round, or maybe determine that you do not need one. However, if you get this execution wrong, it’s over.
Rules for executing in a startup:
First, you have no idea who to hire. Second, a pivot is almost certain, and then what do you do with that person who no longer fits, and just imagines how hard they will work to ensure you do not pivot. Third, you will not attract top talent. Fourth, you have to pay them even if there is nothing to do, and, for a functional specialist, there will be lots of time when there is nothing to do.
Ideally, they only do startups. Startups are very different than established companies. Applying the rules for an existing business to a startup can be very destructive, even if the rules work for an established business. Lawyers, marketing, sales, product development, fulfillment, and manufacturing can all be outsourced. There are many vendors who specialize in startups. A critical guideline to follow when it comes to outsourcing is this: HIRE THE BEST, NOT THE CHEAPEST.
These need to be successful startup entrepreneurs, not established big company people. You’re looking for people who went from idea to exit, not someone who took over at the VC stage and scaled the business. Pay them with equity and/or deferred compensation, not cash (speak to your lawyer about this). If advisors will not take equity, it means they do not believe your business will be successful, likely because you’re making some fatal decision(s).
Meet with your board of advisors once a week to review your startup plan, discuss modifications, and make changes to the plan as needed.
Do not assume anything will work until it is first tested. Spend as little money as possible to test it, and then only scale after you know exactly how it will work.
For successful product development, follow these steps (valuable and relevant white papers for each of these steps can be found on our website)
In the beginning, you are likely going to be developing MVPs (Minimally Viable Products), so the formality of each of these steps will be low. As you move from MVPs to pre-production prototypes, increase the formality of each of these steps.
For sales and marketing, generate and model several different GTMs (Go To Market) strategies. Try small experiments to test each stage of each of the promising GTMs. Determine which GTMs will work before scaling anything.
Once you know your GTM, start at the top of the funnel, write a procedure, execute this procedure, add/correct the procedure as you learn, and then hire someone to take over the procedure. Then move on to the next stage and do the same.
Use the following procedure to train the person:
Once you start getting traction (growing revenues, satisfied customers, fewer fires each day), you are ready for a VC round, assuming you need VC money. This part is not very complicated. If you have done your job correctly, VC has already found you. If they have not found you, it is easy to get their attention. First, do research to determine which VCs will invest in your space (don’t waste your valuable time if they do not). If you really have traction, they will meet with you.
Get at least two VC, and try to get them to compete for you. Sometimes they will “co-invest,” which means they are trying to limit competition. That might not be the best way to get the best price for your equity.
Finally, remember that you will need a good lawyer, one who specializes in startups and knows how to negotiate term sheets outlining the deal terms.