Raising Venture Money

NW Venture Voice has a nice blog entry "How to Shop for Venture Money" for entrepreneurs.

Rule #1: Don’t raise money.
What? A VC saying don’t sell equity? Selling equity is the most expensive way to finance a company. Exhaust ALL other options first. When I left Microsoft in 1997 to start Loudeye, the first six months were total bootstrapped. We begged, borrowed, and squeezed whatever we could out of our reserve cash, friends, neighbors, and even strangers. The first money into an idea is always the most expensive and it should be your own if you can afford it, your own sweat if you can’t. If you believe in your idea, run up your credit cards, take out a second mortgage, apply for research grants, go to the SBA, borrow money from your parents, whatever you do, put some real skin in the game before sharing with any equity investors. Think about it; future investors will value the personal commitment; if your idea is great, why sell part on the cheap? Here is another trick, put in the early money as a bridge loan which converts at a later financing round. Let the market put a value on your idea later, after it is worth more! Necessity is truly the mother of invention. Less money = more necessity = more invention! <>

Rule #2: Choose equity investors with a long-term view.
When you go to a bank to borrow money for a car they ask what your income will be next month, check your credit, ask for a financial plan and make a decision. If anything material in your financial plan changes, they will probably want their car back. Banks have a very low tolerance for ambiguity and bumps in the road. I am starting to see business plans again that are “built to flip” – companies with a 12-18 month view of the world going for a quick sale. Your equity investors should not act like this or condone these strategies. Investors who have been through a couple of tech cycles will have the right tolerance for change and desire to build a business with legs. In good times and bad, in sickness and health (sound familiar?). Ideally there should be a similar level of commitment. Software products are especially iterative undertakings. Remember Microsoft Windows 1.0? 2.0? 3.0? You probably didn’t buy until 3.1 with everyone else. As an entrepreneur with a big vision, you need investors who share a similar time frame. <> <>

Rule #3: Choose equity investors with a real life view.
Good equity investors should be business partners, not just financial investors. Purely financial investors should be the public markets, unfortunately as the mood brightens, many of them will come back into the private equity markets. Look for people who have worked in related businesses to yours. An Entrepreneur turned investor who has raised money and run a P&L statement is a good bet. Ask for references from other companies they have invested in. Call the CEOs. Ask how the board meetings go, what kinds of questions are asked, how the investor manages, their level of engagement, etc. Google your potential investors. How active are they? Do they contribute to trade publications? If they have a blog, read it. Through this research, if you get the feeling that a potential investor is more interested in their golf handicap or mastering an Excel spreadsheet, move on. Life is too short. <>

Rule #4: Choose equity investors who understand and are passionate for your business. <>
Great start-ups solve hard technology problems. I am a technology geek. My first computer was a Tandy TRS-80. I owned a Timex Sinclair, a Kapro, a Commodore 64, Compaq’s first “luggable”, and many other first that I am embarrassed to admit. I get bored if I don’t have a hard problem to solve. I find it incredibly stimulating to be around other people with a passion for technology and a desire to solve hard problems. Investors whose interest in your business is primarily financial and have only a passing interest in the hard problem you are trying to solve can actually do more harm than good. A good way to test this is to pay attention during the diligence process. Do they ask informed questions about your business? Or is it the standard “What keeps you up at night?” Do they get up to the white board during the presentation? Are they candid and helpful with feedback? If you don’t come out of a meeting with an investor feeling smarter, more challenged and more engaged with your business, move on to another investor.