Financing The Start-Up
Reprinted From January, 2000 Valley Business Journal
© Alan M. Insul, all rights reserved
FINANCING THE START-UP
So you say you’ve got the next “.com” that’s bigger than Amazon, Yahoo, and E-Toys combined. You think between time invested, lost earnings, and cash spent (borrowed at 18% credit card rates!) you’ve sunk a million dollars into the enterprise. You have even tied up the domain name and all its variations twelve ways to Sunday – “giagantic_huge.com”. So with all the capital chasing college kids and their internet start-ups, you should be swimming in millions – right? So how come you’re the only start-up in the world still not funded?
Finding the right investor, whether angel or venture capitalist, requires an understanding of the investor mind set. First, they are not risk takers in the sense of gambling or even entrepreneurs taking the same evangelical leap of faith you have shown for gigantic_huge.com. Second, investors look at hundreds or even thousands of deals. It is difficult to stand out from the crowd unless your business plan or executive summary identifies that this is the kind of investment they like. Third, entrepreneurs make the fatal mistake of assuming the venture capitalist wants to run the company, and that they always ask too much for their capital. Investors run, not walk, when they see such an inflexible attitude.
When all is said and done, internet funding has truncated the time associated with money raising, but it has not eliminated the basics. Your plan must show that gigantic_huge.com is selling a unique product or service, or uniquely delivering it. The market potential must be large enough to generate the kinds of returns sought by early stage risk capital. There is a management team that can deliver it. Finally, show the exist strategy for the investor.
Most entrepreneurs fail to recognize that investors in start-up or early stage companies are really risk adverse and seek to hedge or minimize those risks. They look for a product or service likely to capture a large enough share of an identifiable market so as to demonstrate a pay day with sufficient return. Early stage investors, such as angels (i.e. wealthy individuals), loose about a third of the time. Therefore, they look for returns sufficient to make up for their loses.
Some of the things they look for include shorter than their normal investment periods (5 to 7 years). Show some established revenue numbers whether directly from operations or extrapolated from an industry standard. This helps assess the potential market value of gigantic_huge.com. How quickly do you use capital (the “burn rate”). The higher the burn rate, the more you will have to demonstrate where gigantic_huge.com will get the next stage of funding – other than the investor. Can management pull this thing off. This is where the entrepreneurial leap of faith comes in. Muster that enthusiasm so it rubs off on the investor. Do not hide the holes in the management. Gigantic_huge.com is a start-up or early stage
company. Investors understand you are not top heavy in operational management such as financial or fulfillment. Venture capitalists are often your best source of added support to either hire the talent or supplement existing personnel.
Above all else, remember this is not a transaction where the investor deposits the money and you never hear from them again. It is truly a partnership in the sense that you should look to the investor for support. In turn, they look to you to provide honest insight as to your progress in achieving the business plan. For example, if the investor perceives that you consider them a nuisance, or that you do not understand why reasonable financial controls are legitimate, they will invest elsewhere – no matter how gigantic or huge gigantic_huge.com could become … at least that’s what this lawyer thinks.
