You’ve got an idea that you think will revolutionize the business world.
Now comes the hard part. How do you raise the money to fund your revolutionary idea?
To help budding entrepreneurs, we asked some of the College’s most savvy and successful entrepreneurs for their advice on one of the most difficult and stressful aspects of launching a business: Raising capital.
“Our first round of capital was from friends and family. Then, we did a few rounds with angel investors, followed by venture capitalists and strategic investors. Most recently, we raised capital from a private equity group. We have run the whole gamut in this venture.”
Instead of raising millions of dollars or trying to build this world-class product up front, we did it like a stepping stone. We would build a shaky little prototype and use that to raise a small family investment. Then, we used that investment to build a slightly better prototype and get some more money from family and friends. We continued to do that through the first couple years of the company.
The idea is one thing. But, at the end of the day, really what they’re investing in is the entrepreneur. The investor is making a judgment as to whether this person can execute the idea. Investors have said to me they’ll happily take a “B” idea with an “A” team over an “A” idea with a “B” team. It really is the team that’s most important when putting together an early startup.
Greenberg: Before I was going into my first VC pitches, I was reading all these articles, figuring out how to act and how to pitch. But the really good investors out there, they’re not sold by you putting on this song and dance and acting like you’re something you’re not. They’re sold by getting to know you as a person, and buying into you. The really good investors bet on the jockeys, not the horses.
Catchpole: It’s a two-way process, really. Yes, you want people to bring money to the company, but there are also other areas where investors can add value. If you can find an investor who is an expert in your area, that’s almost worth as much as the cash is. Can they bring contacts and connections, things that would be vital to a young company? If two people come in and they make the same offer but one is knowledgeable in your industry and the other has no idea, it’s clear to me that the first investor brings a better overall package.
Lauderdale: Once you have someone as an investor in your company, they become part of the team. While they’re not day-to-day employees, they are actively invested in your success. It’s somewhat like a marriage; you’re in this together for better or for worse. I think the most important message is to make sure that you enter into a financial relationship with people you work well with and trust. It’s important to have alignment. Everybody needs to understand what you’re trying to achieve and what the risks are. Having an open, transparent relationship is important because, more likely than not, you’re going to go back to these investors for more capital.
Greenberg: Capital raising does not really ever stop. It pauses, but it doesn’t stop. I’m pretty sure for the first two years of Grooveshark, there were only two months were [co-founder] Sam [Tarantino] didn’t raise money.
Lauderdale: As an entrepreneur, you’re always on the lookout for where your next capital is going to come from. Cash is king when you’re an entrepreneur. You’re constantly worrying, especially in the earlier phases. Once you get a few rounds of capital in, it becomes a little more manageable, but the stress is always going to be there.
Catchpole: I think in any young company there’s probably no point where you’re not raising money. You close one round and you’re immediately looking ahead to the next round.
Lauderdale: Accept capital from groups that add expertise or value that could be worth more than the money itself. An example is Tom Johnson (BSBA ’72), who is one of our angel investors. He is a seasoned entrepreneur who understands how business works and how a management team works. Having Tom as an investor and Chairman of the Board for a while really provided us with a tremendous amount of management guidance. When times got tough, he provided a loan or additional capital, and stuck with us through thick and thin. I could not think of a better investor than Tom.
Greenberg: Under-promise and over-deliver. A lot of entrepreneurs are a combination of optimistic, eager and shooting for the moon. They’ll promise the world and fall short of it. But I think it’s important for investors to see you setting a goal and reaching it. Understand investors invest in lines and not dots.
Catchpole: People say that your best next investor is your previous investor. After they’ve invested the first time, an investor has a vested interest in your success. So when the investor sees you getting close to that next milestone, they should want to support you. That’s how it’s worked for me. Once people get involved in our company, they see what I see, and they want to help us move forward, which is exciting.
Greenberg: The difference between having one investor at the table and having two is gigantic. If you have one investor at the table, it’s just a matter of time before they realize they’re the only investor at the table and they dictate the terms. If you have two investors, it’s a completely different ballgame. I would definitely advise any entrepreneur to take that into account when you’re ready to strike up these conversations.