Startup Financing: How it Really Works
Let's look at the typical stages in
a successful company's financings. We'll start with the last and finish with the
first. Although there are rare exceptions to this sequence, in most cases it
looks like this:
-The IPO
This is the big pay-off at the end of
years of hard work. It means liquid stock selling at, hopefully, a high P/E
multiple. (The second best alternative is to be acquired by a large company such
as a member of the Fortune 1000.)
-Venture Capital C-Round
The IPO
is now in sight and the C-round is used to "fatten the pig" as much as possible
in addition to preparing the company for it. Often this preparation includes
replacing management with C-level officers who are known to and respected by
Wall Street.
-Venture Capital B-Round
Wall Street is starting to
take notice of the company. Therefore, the VCs want to maximize its forward
momentum.
-Venture Capital A-Round
VCs step in when the business
looks like it has potential for an IPO or acquisition a few years down the road.
-Angel Round
Angels come in with money when you have started
selling. They jump aboard because you now have tangible proof of concept. You're
finally walking your talk. It's no longer all just hot air coming from the
founder. Be honest, talk is cheap.
-Seed Round
At this stage you
have no more than an idea. You are going to build the next Facebook or Google or
Apple...only it will take a year or two of work before there is something that
can be sold. Or maybe it's a dull little business which excites only you?
So, who comes in at this stage if you should be lucky enough to attract
any money? The answer is the "3Fs", otherwise known as Family, Friends, and
Fools. Yes, this means your parents and rich frat buddies from your days at
Harvard or Yale. What's that? Your family is not wealthy and you didn't attend
an Ivy League college? In that case, you are going to have to finance your seed
stage the most common way: with a day job.
Welcome to Planet Earth.
That's how 99% of startups get through the seed stage.
I am providing
this information because so many people post online requests for funding to cover
2 to 3 years of coding or R&D. Then when they are ignored, they get angry.
If you are realistic about what types of scenarios attract investors,
you won't get angry. Instead you will work to create an opportunity that will be
attractive to investors at every stage.
If you think that you are going
to attract money to cover your living expenses and provide a bit of fun money
while you code or do R&D for 2 or 3 years, you are in for nothing but
frustration.
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