Nivi · May 12th, 2010
Last week, I tweeted some thoughts for first-time entrepreneurs raising money and asked Naval, Chris Dixon, and Mark Suster to chime in. Here are the results.
Me
If this is your 1st time raising money…
- It takes way longer than you think.
- You’ll assume you’re much further along than you really are.
- It’s not about optimizing the round, it’s about whether you can raise the round at all.
Naval (@naval)
If this is your 1st time raising money…
- If you’ve launched and have traction but you’re not getting funded, your team is likely the problem. Look in the mirror.
- Your financing usually goes nowhere until you’re suddenly oversubscribed.
- Launch first, raise later.
Chris Dixon (@cdixon)
If this is your 1st time raising money…
- Make sure the valuation is one that you can get a 2-3x step up on if you hit your milestones.
- The earlier the investment stage the more you should think of them as partner versus buyers of stock.
- After 3 months of pitching, you risk being perceived as damaged goods.
Mark Suster (@msuster)
If this is your 1st time raising money…
- The biggest problem is “anchor tenants.” Once you get them, the lemmings will follow.
- Everyone wants a “deal.” Even rich people. Get the highest profile anchor tenants and give them a deal. My commentary is specifically related angel investing.
- Everyone obsesses with dilution from investors. The biggest dilution comes from co-founders. If you have 2 co-founders, you’ve diluted 66% before doing any of the hard work. Start by yourself and bring in co-founders for smaller stakes once you’ve got initial momentum. Unconventional wisdom, but the most economically practical advice you’ll ever get.
@msuster’s 3rd point is brilliant.
If your investors are assholes while getting the deal done they’ll be worse once they’re on your board.
And a great one I heard from our attorney just yesterday “There is an inverse relationship between the aggressiveness of the terms and the caliber of VC.”
Great wisdom from all – thank you. Question for Chis Dixon on point 3 – what is the best next move when damaged goods happens?
What has happened with the R&D startups? Everyone’s talking about launching first, having traction, having income etc. before going for funding… This means that the founders have to have enough funds by themselves to reach that point, and that their product can be developed cheaply and quickly, probably using existing technologies.
But there are great startups developing completely new technologies with great potential, but which can’t hope to reach any income any time soon. Once upon the time such startups were the norm — from Fairchild to Apple to Cisco to Google — while today it seems like everyone’s looking for a quick hit built on some generic technologies — looking for a Facebook, or a Twitter, or a Foursquare…
@Naval, when looking in the mirror, what should we be looking at? What defines a good team versus a bad team?
Not sure I agree with Mark’s third point. Especially as a first time entrepreneur, your risk is not about getting over diluted. Your risk is that your shares never become worth anything of value. Being a solo entrepreneur can be hard for people who have done it before. A good co-founder/partner is worth their weight in gold (possibly literally).
I agree with Tim. Many startups fail due to a lack of trust and chemistry, so getting a co-founder strategically after you built up some value isn’t a good step forward. Then you’re potentially inviting ignorant or 2nd tier people to be your co-founder.
And if you hit a home run, there is enough on the table for everyone. I don’t think the founders from Google to Yahoo to even Flickr are complaining. Even 3-4 founders like those guys at Sun and others are very comfortable in life.
Hi Mark,
I took your advice number 3 (founding myself) but often got the “incomplete team” feedback from VCs (not from Angels which is where we’ve raised our money from. What do you think about that tradeoff?
“Launch now, raise later” is a common theme these days.
I think the unclear underlying message is “Start simple.” For your first start-up, pick something specifically because you CAN achieve “launch now, raise later.”
You can go after progressively more challenging opportunities as your track record grows.
One way to short-circuit this process to some degree is to find someone else with an existing track record and convince them to join you.
If you’ve never done it before, get with someone who has.
We got our money through fairly close relationships with our members (Angels)… We had income, we had a plan and we worked our tails off (still are) before going after the money.
It’s an uphill climb if you have nothing but an idea. Eat beans and rice for a while and MAKE SOMETHING. Your track record will grow and so will your ability to entice other people to give you their money.
This is specific to an angel round:
1. Find a “friendly” angel early on who can help you through the process.
2. Don’t pitch too early. It is better to say “I’ll be fundraising in 3 month” than trying to test the water if you are not ready.
3. Set a deadline (closing) once you have your key angel investor & manage everyone towards the deadline.
Obviously it’s better to have less dilution, but in the end you should remember the first rule of finance – raise money when you can, not when you need to.