Startup Strategy: The Investors

In our previous article we looked into the funding and partnering options with the government. This is important – if we’re able to secure funds from these resources, it makes fundraising from investors easier (as some part of the due diligence has been done) and it also helps to keep the dilution lower when taking investors on board.

The first two companies that I started didn’t require external investment. A bridge loan maybe yes, but we never had external investors on board. With Unified Inbox it was a different story though and one that I had to learn the hard way. There you are – you had an excellent idea, one that you believe can change the world. You have been able to motivate and build a team and put the resources and strategy around it. And you even have a prototype to show and prove it. But believe me – fundraising is a completely different ballgame! What you have, is not enough.

Having a viable business idea is very different from having a fundable business. Ideally everybody who gets funding should have a viable business. But, that’s not always the case. Equally despite having a viable business, you may not get funded. Confused? So was I.

When considering raising funds, a close friend once told me: „You realize you’re getting into a big ocean. It may take an entire lifetime to truly understand it.“ And he was right. So before you think of utilizing this startup building block, let’s first acknowledge that extremely few companies actually get funding and that (if you haven’t done it before) the chances of doing it wrong (or to your disadvantage) are incredibly high. Money comes at a price and more than often, that price is too high or has conditions attached to it that make it too high.

Therefore, knowledge of what you’re getting into is important. Learn as much as you can about investing and especially the current trends (is B2B or B2C hot, what model works, for example a straight equity round vs. a convertible note round, latest valuation metrics and so on…) and get to know („cyber-stalk“) your investors or the people you want to approach. There is a ton of money out there and innumerous so-called investors. But there are only a few genuinely good ones. So do your homework.

When I realized I’ll have to raise money for Unified Inbox, I started with reading the book „Be smarter than your lawyer and venture capitalist“. It explains the terms and conditions used in financing rounds really well and I strongly recommend anybody looking to raise funds (no matter in which way as we see below) to go and read it. In addition study some of the personal blogs of well known entrepreneurs and VC’s (Venture Capitalists), such as:

While doing so, you’ll learn a lot and be able to converse in any investment or funding discussion with ease. Yet, despite a lot of really helpful advice being offered to entrepreneurs on many blogs – please stay alert and remember one fact: by definition VCs are in business to serve their Limited Partners (LP’s) whom they themselves have raised money from to have a fund available that enables them to work with you.

Some key lessons I’ve learnt along the way:

  • When you need financing the most, you often won’t get it. Be prepared to come across situations where you don’t know how to finance the next month and realize the risks that come with it.
  • Taking money always comes at a price. It’s not just about dilution. You will feel pressure and responsibility to provide a return of investment, especially if you’ve taken money from friends & family and no matter how big your belief in your venture is, there is no guarantee you will make it.
  • As a general rule of thumb, you need 3x more money and 3x more time than you estimate.
  • Once you’ve taken external financing, act fast and pray that your plan works out as financing is like heroine: once you’re used to it, you need more, and, you ultimately lose control.
  • Don’t accept what appears to be people or terms that are too good to be true. It usually is.
  • Know your worth and stand up for it. At an early stage, avoid valuation discussions. Use a convertible note or equity as an instrument to delay the valuation discussions until the proper milestones have been reached.
  • If you’re a first time entrepreneur getting into a good accelerator program before raising money is usually a good idea.
  • Bootstrapping till exit or not bootstrapping at all is ideal in many ways.
  • Avoid the pre-launch dilemma: it’s much easier to raise funds for a product or an idea as long as it isn’t officially out yet. The moment it is, you need concrete numbers: signups, retention rates, sales etc. – but in very early financing rounds, the individual investor can create their own vision for what is possible.
  • Launch in a limited way: try to be in a position to control your costs and cashflow when you launch. If you need to scale to a thousand servers to satisfy the demand without having the cash in the bank, it’s not a good place for you to be in while negotiating with investors.
  • Treat your users / customers as if they are your first investors. Learn from them as early as you can, and, if you can launch in a limited way, do that in order to avoid the disappointment of building something nobody wants, even if the product isn’t perfect yet. Don’t be afraid of charging.
  • Try to have a backup plan if your funding runs out. Who will continue to work with you, how? Can you pay the servers and bootstrap again? Whether you actually do that or not is secondary, but even the illusion of having a backup plan will help you to manage your own psychology during difficult times or in investor discussions.
  • Most investors have a herd mentality. Once somebody is invested, others tend to follow. Investing with a friend is also more fun, so try to entice any new investor into finding a couple of others that could consider investing, too.
  • Be careful whom you spend your time with getting a deal done as time spent fruitlessly on fundraising will greatly limit your ability to execute on your product, team and building your business.
  • If in doubt whether to accept money from an investor, ask yourself whether you’d want to have a beer with that person even after a long and hard day of work.

The toolkit:

  • Create an AngelList profile and manage it well. Optionally you can use Gust, too.
  • Build a mailinglist or group network with your strongest supporters and update them regularly (1-4x per quarter) with updates on where you’re going. Mailchimp and Yammer are good for this purpose.
  • Create a Pressdoc account and keep building a list of editors/bloggers whom you can push out news to occasionally (so that they have you on their radar in case you decide to announce a financing round).
  • Have a Dropbox folder ready for investors including a one or two pager and a 10-20 pages slidedeck (see template) with your business details, C.V.’s and strategy docs. Update it regularly and track who opens it when you share the url with them.
  • Be spot-on at social media and own the conversation around key topics on Twitter, LinkedIn, Facebook and Google+

Some ways to raise funds:

  • Friends and family. It’s a positive sign for other investors to see that friends / family have backed you, too.
  • Crowdfunding. It’s the ‘new’ way of raising funds, especially if you have something „tangible“ to give away fairly soon. You’ll need a brillant video and social media strategy though, so give this some thought before trying it. Some crowdfunding sites take equity, others don’t. Pay attention to the details and terms & requirements. Good examples are: Kickstarter, Indiegogo, Fundedbyme, Secondmarket and many more.
  • Angel investors. There are quite a few very sophisticated and smart angels out there, but even more wannabes. Be careful how much time you spend with individual angels.
  • VC’s – pick your approach and whom you want to address an opportunity with carefully. They generally have a very good description which type of deals they like and where their sweet spot is. If they can’t get a deal at a certain valuation to secure a board seat, they may be out, though this is slowly changing.
  • Not an obvious but natural choice: get investment from people that want what you’re building. This can be your early beta testers or customers that would pay some kind of deposit in exchange for a „life time membership“ or it can be a corporate partner who has been looking for a solution like yours to sell to his clients. Often this kind of investment can be equity free and sales focused instead, therefore providing you with an interesting go to market (and possibly even exit).

Summary

While investors generally are a great form of credibility for corporate partners and in front of other startups, to get customers and make money they actually play a less important role. If as a customer I ask myself whether the product/service I’m buying will still be around in another 12 months, it’s not the investors in the business that make me confident in my decision, but how well the business and products offered in itself are presented and poised to weather a storm.

It’s interesting to think that on one hand getting investment is a core startup building block as others have trusted you with their money and joined your venture with the confidence that it will be successful while on the other hand it also means you’ve on some level taken a decision to exit your dream – hopefully when the right time comes.

So depending on your approach, fundraising may not be the right startup strategy for you and getting funded most certainly shouldn’t be the goal. Even building a business is not the goal. Creating meaning in people’s life’s and providing them with solutions and services they love to live for and want to use them, is.

3 thoughts on “Startup Strategy: The Investors

  1. Pingback: How to Stay Ahead of Startup Trends

  2. Pingback: 10 Strategic Building Blocks for your Startup | Toby's Blog

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