Photo: Bob Rice
The biggest challenge for entrepreneurs with great ideas is getting their startups off the ground. “If you can’t execute, you don’t have a company,” Laura Sachar, general partner and founder of StarVest Partners, says on a panel at Business Insider’s Startup 2012 conference. “A lot of people have ideas.”
With so much competition in the market and numerous routes to explore at the beginning stages, every fundraising choice you make will have long-term consequences.
To help entrepreneurs make their startup idea a reality, we’ve interviewed a bunch of entrepreneurs and investors about the best ways to fundraise.
The sneakerhead streetwear startup Soletron is currently in its seed round and co-founder Steigman says they're not 'twiddling their thumbs waiting on investors.'
We caught up with the former banker who shared with us some tips that he's using right now for his own round:
1. Make a list of all potential investors.
Steigman says that for your seed round, you should look to friends, family and Angels. For your Series A round, you need to brainstorm any VCs and super Angels.
'First, you need to get on the radar of anyone who's an Angel investor in your industry.'
And Steigman says you need to 'court' them because 'very rarely does an Angel or a VC reach out to you.'
It's up to you to engage their interest immediately, or you'll lose them.
2. Figure out what investors are going to attack you on.
'Every entity has weaknesses and you have to be able to say 'Hey, we're weak in these three areas' because investors are always looking for a way not to invest.'
'Some companies have a lot of traffic and not a lot of revenue. Some companies have a lot of revenue and not a lot of traffic and you have to be honest with these investors.'
3. It's all about momentum and snowballing.
'The first dollar is always tougher than the last dollar. It's important to have a prominent lead because that'll snowball everything else.'
But Steigman says entrepreneurs need to be apprehensive when raising money, because it may also 'take the focus away from your business.'
'You always need to have a bird's eye view. The more capital you raise, the more diluted your investment becomes. You need to know where the capital's going.'
If you can't convey what your business is about, no one will pay attention to it, says Hintz, cofounder of travel organiser Tripit.
Specifically, you have to explain the product and experience well, along with why people are going to fall in love with it.
'You want to paint a picture in your investor's mind of this new company having Apple fanboys,' says Hintz. 'It fixes a lot of those other problems. You have to, of course, have some models of what the business could be worth. You have to have it, but I wouldn't over-think it.'
It's important not to over-complicate things. Presentations have to be informative, but simple and exciting too.
'You kind of really have to dumb things down for VCs, so point to analogies -- similar business that were really successful, to take away as much risk from the idea as possible,' says Hintz.
It will be much harder for a first-time entrepreneur with no track record, because VCs will see that as more risky. There has to be some way to reduce the risk that the VCs are taking if you want them to buy into your idea.
One way you can do that is through your team. Going out and finding a partner that has had success can be helpful, explains Hintz.
Hintz is a staunch supporter of the strategy to take the money whenever the offer is there -- forget about the valuation. He has seen people decline a term sheet and then waste months trying to find another offer. It often turns into just a big waste of time, and your time is valuable.
'You need the money,' says Hintz. 'I personally spent far more time than I liked on the fundraising process. I want to minimize that as much as possible. Don't be stupid, but if someone's offering you money, I'd be pretty inclined to take it.
'If the money was more expensive than you thought it should be, you just have to be smarter with the money that you have. That scrappiness is kind of a good thing.'
'You need to be able to get your point across within a minute while you've got someone's attention ... before they start to wander,' says the managing partner at Tangent Capital. 'It's almost like a headline in a newspaper.'
This means that before you go into telling your entire story, you need to tell the most important part of your story.'
The investor is also a contributor on Bloomberg's 'Buzzword of the Day' on the Money Moves segment, which is the first show that gives advice to entrepreneurs about alternative investments, or ways to raise money for your business besides going the Angels and VC route.
We caught up with Rice to gather some tips for entrepreneurs hoping to raise money:
1. Be completely honest.
This means that if you don't absolutely know the answer, you should admit that you don't. In these meetings, Rice says that investors are 'betting on the jockey, not the horse.'
'If there's even a whiff that something's not right, it's over.'
2. Do homework on your competition.
'It's highly unlikely that no one else has thought of this idea,' Rice says. 'If I ask you how your company is different than so-and-so's and you give me a blank look, I'm going to think, 'Oh, man'.'
Instead, you should say something like 'Well, no one else is doing it like we are, but the closest competitions are X, Y and Z.'
3. Don't be too sold on your vision.
You should believe in your idea, but Rice says not to give off the impression that you 'drink so much of your own Kool-Aid that you're not going to take coaching so well.'
'It's the first date. You're looking at forming some kind of long-term investment. There has to be trust. I better get the impression right away that you're a likeable person, you're going to work well with others, that you're presentable in front of my partners and that you're not going to be an egomaniac.'
'There's a shift in fortune all the time. I want to know that I'm partnering with someone who has the urgency to get it going quickly, but also the flexibility to make changes in case something happens down the road.'
4. Make sure you're pitching to the right investor.
Again, do your homework beforehand and seek out someone who's interested in this area or someone who's going to write the check you need them to write.'
'Most VCs will go through a checklist and everything's got to meet our criteria. If we're vegetarian, we don't want to see a steak.'
5. Follow up, but 'don't be a pest.'
At the end of the first meeting, ask the board when you should expect to hear from them. Most investors will contact you pretty quickly afterward.
'These days, things are happening faster than it used to. If you spend six months spending time thinking about the deal, the advantage that the entrepreneur originally had is now gone.'
This means you can certainly follow up, and the best way to do this is with a news hook. For example, contact the investor and say 'Oh, I don't know if you saw, but this just happened ...'
In order for entrepreneurs to be successful today, Rice says that they 'have to be even more entrepreneurial, because there's some permanent shift in the way entrepreneurial works.'
Investor Laura Sachar says she can spot entrepreneurs who have ideas, but don't know how to execute them
Sachar, general partner and founder of StarVest Partners, has been involved in early stage companies since the mid-'90s. She shared her insights on a panel at Business Insider's Startup 2012 conference:
Sachar focuses on people in the early stage, because it's about the belief that the person can figure out what to do with the business to make it successful.
'Often, the initial idea is not how the company succeeds and drives revenue,' says Sachar. 'Focusing on the people first, and a belief that they can develop attractive ideas and move from there, makes sense.'
There needs to be a clear path that shows that the person can turn the idea into something real.
'If you can't execute, you don't have a company,' she says. 'A lot of people have ideas.'
Nowadays, companies don't need as much money to get momentum. She suggests that you take more money than you think you need (if it's available), because so many investors are looking for the companies that are gaining tons of velocity in the early going. By having that money, you have more resources to pull that off.
Ellman, co-founder and managing partner of RRE Ventures, shared his thoughts on fundraising at Business Insider's Startup 2012 conference:
Ellman sees about 6,000 deals every year, so of course, he's a hard person to get to. So how do you break through all that clutter and get your voice to reach a VC's eardrums? You need a personal recommendation.
'A cold introduction is sort of lesson number one,' says Ellman. 'If you're savvy enough to be an entrepreneur who gets money raised or savvy enough to figure out somebody within the venture firm who knows somebody at a portfolio company to literally say, 'you should meet with this company.''
It used to be pretty easy to raise a seed round if you were a good entrepreneur, but now there's so many seed companies and so many people looking to fund them that it's hard to differentiate yourself. Once you're past that, investors start pounding at the doors of the ones that are getting traction, and your performance in the marketplace becomes your differentiator.
The difference between seed and Series A is 'where the rubber meets the road,' says Ellman. At this point, everybody focuses on numbers, metrics and performance. If you don't have those metrics, it's very hard to raise that money.The ones that can pull that off are the ones that gain traction.
'They find it very, very easy. They don't even have to go out to raise money because everybody's calling them and trying to get into their companies.'
For those that aren't performing well at this point, there has to be something there that completely differentiates you to the point that someone's willing to lay his or her money down behind it.
Entrepreneur Arjun Srinivas shares one of the biggest mistakes his company made in its Series A round
After winning a Wharton Business School competition, Srinivas and his co-founders walked away with a number of awards and $30,000 in grant money for their startup Innova Dynamics.
The company ended up securing $4.5 million in their Series A round and even had to turn down investors.
Although he considers them successful in their funding, Srinivas says one of the biggest mistakes the company made was taking too long to decide who to bring on as investors.
'It took us an entire year to close up our Series A because we were in an 'analysis paralysis.' We had all these options on the table, and when we finally closed, we wound up doing a lot of what the investors told us to do or suggested.'
'That really early stuff is almost exploratory.'
'Both the entrepreneur and investor knows that what you wind up doing is never what you're going to do in your business plan. And it's not because you're lying, but sometimes, something you think the customers are going to love, they end up hating, and you'll have to tweak it.'
Srinivas tells us that one firm even spent $50,000 in legal fees just to analyse their patent.
'It was like deep diving through everything we knew.' he tells us.
Innova Dynamics is currently in their Series B round and is targeting $10 million by the end of the third quarter this year.
Ron Fleming tells startups that 'it's going to take twice as long, and it's going to be four times harder than you ever thought'
Fleming, co-head of emerging companies at Pillsbury Winthrop Shaw Pitman, tossed out some practical insights at Business Insider's Startup 2012 conference:
'Unless you're one or two luminaries in this marketplace, it's going to be hard to raise capital,' he says.
There are plenty of great stories out there of companies that raised a ton of money right out of the gate, but for every one of them, there are hundreds of others that struggle for ages to get funding, or fail outright.
The money is, and has always been, out there and available. But that doesn't mean that you're guaranteed to get a piece -- or that anyone will, for that matter.
'The question is whether people are willing to open up their checkbooks to fund somebody's dream or great idea,' says Fleming. At times, the whole market will tighten up and make things harder for everyone.
The activity of VCs and angels flows all the way down from the highest levels. For instance, all the excitement over the big tech IPOs and acquisitions made people more willing to put their money out there to support early stage ideas, says Fleming.
Business Insider Emails & Alerts
Site highlights each day to your inbox.