The Seed Capital for Startups Blog

How to Raise Startup Capital. Or Not?

Raising Startup Capital for the Next Facebook

This short little video is packed with lessons for startup entrepreneurs.

(source: www.antiventurecapital.com)

For international viewers: http://www.xtranormal.com/watch/7739783/

8 Websites People Really Need to Stop Building

8 Websites People Need to Stop Building

If you run a website for startup financing you see a lot of startups over the course of a week. Every last one is convinced that it is doing something unique or that at the very least it is only the second company in the space. Meanwhile, it's the third company with the same basic idea that I have spoken to just that week.

This is why I got such a kick out of this:

8 Websites People Need to Stop Building

How to Raise Startup Capital: Lessons From Deal-makers

How to Raise Startup Capital: Lessons From Deal-makers

From working with entrepreneurs since 1986, I have noticed one glaring problem most have. Most have no idea how to sell their startup or deal to investors. Instead they just write a business plan and shotgun it out to everyone. Then after a few months, when no one has jumped on it, they start complaining that investors are "too stupid" to see how wonderful the investment opportunity really is.

What rookies fail to take into consideration are tangible economic incentives and psychology. Deal-makers, on the other hand, understand how to offer short-term economic incentives made all the stronger by appealing to psychological needs.

Would you like to learn how to put together B2B deals? If you answered, yes, get a copy of How Deal-makers Raise Capital.

Order it today before the price goes up.

How Deal-makers Raise Capital

Or get the full manual on creative startup financing.

Raising Capital: 88 - The Narrow Road: A Brief Guide to the Getting of Money

88 - The Narrow Road: A Brief Guide to the Getting of Money by British billionaire Felix Dennis

Felix Dennis' long-awaited 88 - The Narrow Road: A Brief Guide to the Getting of Money is finally out.

There's no information on this new book on raising money on Amazon yet, but even if it's only half as good as his other business classic, it will be a worthwhile addition to any entrepreneur's library.

I am eagerly looking forward to reading this one. Felix Dennis is an inspirational figure in the Billionaire Strategies Course.

Get more information on 88 - The Narrow Road: A Brief Guide to the Getting of Money.

How to Use Creative Financing to Start Your Business

Free Mini-Course in Creative Financing for Startup Entrepreneurs

Are you an Entrepreneurial Champ or Chump? Find out.

Champs are the ones who understand how entrepreneurial finance works. Chumps are those who sit around hoping that some kind stranger will give them money after reading their business plan. When it doesn't happen, they complain about investors being "too stupid." You can increase your chances of being successful in attracting capital down the road if you learn how savvy entrepreneurs are always moving their companies forward.

You can subscribe for free here: Send Me Creative Startup Financing Mini Course Right Now!

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a link in the confirmation email.

No thanks! No time to waste, just let me have the creative financing manual for startups!

Startup Capital: How it's Really Raised

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.

Venture Capital's Coming Collapse

Forbes has a very interesting articled dated January 12th, 2009 titled Venture Capital's Coming Collapse. Sounds as if reality has finally caught up with the VCs too and not a moment too soon.

Here are a few key excerpts:

The swashbuckling risk takers in venture capital have been laying giant eggs for a decade. Could this finally be Sand Hill Road's day of reckoning?

...

The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.

...

Heroes of capitalism they’re not. It has been 11 years since the venture industry has returned more cash than it has plowed into investments, according to the National Venture Capital Association. The industry is now managing $257 billion, up from $64 billion in 1997.

...

It would be helpful if there were some way of knowing in advance which firms are going to be the good guys. Apart from those in the very top tier, which consistently outperform, it’s difficult to know.

That’s always been the case in venture. But since equity markets cratered earlier this year, many big investors are scrutinizing all their holdings more closely. Illiquid investments like venture-backed startups don’t look so hot. VCs “have been living off fumes for a long time now,” says one prominent Silicon Valley investor. “If you have any money, the last thing you’re going to do is put it into an asset class that hasn’t generated a return for ten years.”

...

Until recently VCs have been able to keep the cash coming despite dismal performance because of the long-shot nature of their business: Investors know that one Google or YouTube could make them millions even if most other bets bomb.

The venture industry promotes that spin. Christopher Douvos is a manager in Palo Alto, Calif. with the Investment Fund for Foundations, an $8 billion investment pool headquartered in West Conshohocken, Pa. He sees the sales pitch of venture capital as “lottery slogans with an Ivy League veneer.” Instead of saying, “Hey, you never know” or “You’ve got to be in it to win it,” the industry talks about “asymmetric outcomes” and “optionality,” he says.

...

Just ten short years ago everyone and his uncle was a venture capitalist or at least claimed to be. People who by virtue of little more than pure luck had cashed in big after their employer had IPOed would regularly announce the opening of their very own VC firms. By 1999 half of the Microsoft staff were venture capitalists. Then it all crashed in early 2000. This is now the final nail in the coffin for the industry. Only the very best will survive.

Read Venture Capital's Coming Collapse in full.

We have now officially returned to the era old school creative financing for startups and early stage companies. The entrepreneurial world is as it should be.

The Dreaded Lunch Invite From Your Venture Capitalist

In about 50% of instances where an early stage company actually succeeds in raising venture capital, the founder CEO is fired within the first year and kisses most of his or her equity good-bye. Even the Wall Street Journal pointed this out in a article by Barnaby Federer from 09/30/02:

"If you ask a VC what value they add, and you get them after a few drinks, they'll say, 'We replace the CEO' ", he said. And that, he indicated, does not vary with the economic climate.

It usually occurs in this manner. The venture capitalist invites the founder out for a friendly lunch. During the meal the venture capitalist brings up a new person who would benefit the company greatly through his connections or industry experience. The venture capitalist explains that although this person is not available to serve on the management team, he could probably find the time to serve as a director. Yes, it would mean making the board larger than originally agreed to by everyone but this guy is a “star”. The founder wishing to please his venture capitalist reluctantly agrees to the change in board size.

The new face turns out to be the extra vote the venture capitalist needed to make wholesale management changes. Within a week the board has fired the founding team and replaced them with friends of the venture capitalist. Oftentimes the new board member assumes the CEO role.

Yes, this scenario happens often and has little to do with the founding team’s performance. Venture capitalists just prefer their friends at the helm.

Bottom Line: If you had the clout at the beginning to negotiate a board of directors balanced between management and venture capitalist, don't be a wimp and give it away for nothing. To do so only reinforces the venture capitalist's belief that he was right about replacing you.

The best tactic to employ when faced with this offer is tell the venture capitalist that you 1) can't recommend someone for a board seat until you are satisfied that they can make an actual contribution, and 2) that since the board is working well it would be preferable to compensate this person--once they have made a tangible contribution--with consulting fees instead of a board position.

Finally, if you sense a strong negative reaction from the venture capitalist you can be assured that there's trouble brewing in River City and it's spelled with a capital "T".  He will always have a Plan B for pink-slipping you and it won't be pleasant. Call your lawyer immediately, and I mean your lawyer not the company's.

You're about to experience your own personal "Night of the Long Knives".

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Learn how to maintain 50 to 100% per annum growth rates for your business with M&A.

 

Secrets of Raising Venture Capital #728

The Latest Silicon Valley Look

Everyone knows that when you're dealing face-to-face with clients or customers, you should try to look and act like them. The same rule applies to dealing with suppliers. So it behooves you to use the same tactic when pitching your startup to venture capitalists.

The undersized suit is the latest rage amongst the Silicon Valley venture capital crowd. The unidentified gent in the photo apparently works for a white shoe venture capital firm.

My advice to venture capital seekers is to hang out at Buck's of Woodside with a copy or two of your business plan while wearing a suit that you ran through the wash/dry cycle at least five times.

Good luck.

Venture Capital Finders

To be honest, my BS detector goes off immediately whenever anyone introduces him or herself as a venture capital "finder" or "broker." These words are normally "tells" that you are dealing with a con who is going to ask you for an upfront fee. While there are rare instances of a middleman assisting in a financing, I have never come across anyone who could deliver the goods more than once. What I have seen over the years are people, who through luck more than anything else, happened to be in the right place at the right time when a financing went through. They then attempted to establish themselves as finders by greatly exaggerating the role that they had played.

So my questions are:

1. Do you know of any venture or angel capital finder / middleman / broker who has put together two or more financings?

2. Do they charge upfront fees?

Every week I receive emails from desperate entrepreneurs wanting to know if they should hand over advance fees to these people. There's even a west coast angel group that charges $2000 just for the privilege of doing a dog & pony show to its alleged members.

While capital from personal loans might be available it's not always the best beginning to a business model.