THE DREAM IN ACTION

[This is the second portion of a series on raising seed funding for a web startup. You can find the first post here, where we discussed referrals, short pitches, accountability, and tracking opportunities. Note: I’ve never raised any seed money for a startup. I write these observations to share what I’ve been learning and to motivate myself and the other entrepreneurs in my shoes to get out there and get’r done.]

I won’t take those terms. You know your situation better than I do so any decision about funding must be very specific to the conditions of that startup. Always keep that in mind. However, it’s my opinion that if your a new entrepreneur, you take what you can get. Don’t push for one form vs. another, or hold out for a great named investor. Take something to get you going and/or keep you alive. If you’re important to the business as the entrepreneur (which I assume you are) then you get equity in later rounds, they’ll have too to keep you. People who are good get compensated, end of story. On your second startup you can become particular, negotiate harder, and work with the big name investors.

Giving away shares for cash. A lot of founders and early-stage investor are focused on percentage. This may help in initial deal terms, but this is a short term number. It’s healthy and common for companies to take 2nd, 3rd, and more rounds of funding so percentage won’t ultimately matter. What you need to focus on is price. Investors want to avoid dilution but often mix up percentage dilution with economic dilution. Their percentage might decrease but the value may increase.

Percentage dilution in most contexts is actually rather meaningless, but economic dilution is crucial.  The reason is simple.  An emerging business which is growing and creating value for itself is able to sell its shares at a higher common share equivalent price than in previous financing rounds.  Under this scenario, new investors buy shares at a higher price than existing investors.  Existing investors surely suffer percentage dilution, but they also enjoy economic accretion.  This is a good thing for existing investors, because although their percentage interest in the emerging business goes down, the value of their economic interest in the company goes up.

Once you throw blood in the water the sharks come. Ok I’m not sure if the analogy is that good but deals will get competitiveve once you have a single term sheet. Momentum becomes critical to prove to your first investor that you’re legit and to show that the deal terms were favorable. Each consecutive term sheet you get makes the next one easier. Remember that pipeline we talked about? Now is the time to hit that hard.

Here’s a voicemail Travis Kalanick left on a 2nd termsheet prospect on a recent *competitive* deal. The recipient of this voicemail called back in 5 minutes, AND ended up being the lead on the deal (notice the urgency while staying true and credible):

Hey , wanted to check in with you regarding . . .things are heating up with a couple other parties and it looks like things could get done pretty quickly from here… wanted to check in with you, see where you’re head’s at on the deal, and see if we there’s a shot we can work together on this one… give me a call back as soon as you can… talk to you soon

Piggy backing is piggy banking. You’ve likely talked to many “small time” investors leading up to this point. They weren’t ready to make the investment at first but now that you’ve landed a term sheet from a likely larger investor there is nothing wrong with letting the small players piggy back the deal. They now have confidence that it’s a legit investment and can just use the same terms as the existing term sheet. $200k can double or triple relatively quickly this way so don’t slow down after 1 or 2 investors agree. The clock is ticking.

Don’t be this guy, what an idiot.

The best entrepreneurs are never finished. Keep selling your idea, keep piling on investors at the original terms, and don’t let the first big guy change his terms just because you’ve added others, fight collusion. A very smart entrepreneur, Travis Kalanick, says that “until the deal is closed, you have at best a 50/50 shot of it happening.” The moment you think you’re done with a deal, watch this video again and save yourself the embarrassment.

image via BenGoode

Related articles by Zemanta

• Term sheets that you don’t want (startupcfo.ca)
• Raising Seed Funding For A Startup (Part 1) (thedreaminaction.com)
• The Down Round (startupcfo.ca)

If there is one thing that I do plenty of at GE, it’s present. Whether this be over the phone or in person telling a story in a business setting is a skill that one should continue to foster and treasure everything you learn. Along with presenting, the skill of building powerful Powerpoint presentations in order to communicate a project status, present a business case, and sometime request funding for a project is key. I’ve never pitched VC’s or Angel investors for funding on a startup, although I may soon :), but I have learned a thing or two about requesting cash using a solid slide deck and good story.

Recently, I’ve been studying methods on pitching for startup venture funding and have looked through many example decks and I’ve created this list of tips for getting funding in either the corporate or startup worlds. Believe it or not, I find many similarities between the two. I’d love your feedback on which tips have worked for you or which tips you disagree with.

lanjut →

via mario.nolla

I’m now working on startup numero 3. I’ve thoroughly enjoyed the process but I’ve not really enjoyed the process, yet. As in, I’ve not made it. I’ve yet to create anything that was sell-able, sustainable, or strong enough to go full time on. So, I decided to make a list for myself of the first 25 things that I should do before really diving into the next one. Each step or tip has a link to resources on making that step happen. Follow these steps (not necessarily in order) so that you don’t have to use tip #26.

Here’s what you’ll first need to do in order to really start on the right foot.

1. Get Your Head Right
2. Build The Right Foundation
3. Put Your Lipstick On and Pucker Up
4. Getting Attention
5. Oh Yea, You May Need Money

Get Your Head Right

There are so many great blogs out there with experienced advice on starting businesses that it’s foolish not to read them. Spend some time learning from the experience and mistakes of others.

“Smart men learn from their own mistakes, Genius’s learn from the mistakes of others.”  -Unknown

1. Start a Business with Passion – Loic Lemeur is one of the most passionate entrepreneurs I’ve watched. He talks about how to start with passion.
   
2. Read Getting Started - This book by 37 Signals is one of the best books for starting a technology business. How to develop with style, speed, adn efficiency using Agile. Learn from the great companies especially when the provide such a valuable & insightful resource.

lanjut →

As I continue on my quest to better understand venture capital the question arises of, what is the difference between angel investing and venture capital? I’ve found there are many; involvement, who’s money, what stage, what size, required performance post investment, type of person, etc. The differences are practically endless so I’ll try to address the basics here.

First, Angels are investing their own money, they are usually individuals not private entities, although there are a decent amount of angel networks that pool money for these types on investments. Angels typically get involved much early in the start-up process and for better or worse their investment decision is much more emotionally charged. Because of that emotional involvement the angel is usually much more involved in the growth process.

Venture capitalist are an entirely different beast. The perceptions of VC’s varies quite a bit amongst the start-uppers and entrepreneurs who often seek there help/money. The term “vulture capitalist” is not uncommon and is used for VC’s who take all control away from the entrepreneur who is building the company. Different from Angels, VC’s are investing someone else’s money and get paid a mgmt fee (around 2.5% of the total fund) and also get carry (a piece of the upside gains, around 20%). A VC’s performance is measure by the investor or LP (limited partner) and a VC is successful by picking long shots and helping them “make it”. Venture capital investments usually come at later stages that Angel investments and VC’s look for “exits” or profitable outcomes usually in the form of an IPO or acquisition. These events can usually return 5-10x on investment (or higher) for big pay-offs.

However, when it comes down to it, both Angels and VC’s are looking for extremely high returns because the investments they make are extremely risky. For VC’s this is a job and for Angels, it is an opportunity to be involved with a success story and entrepreneurs should realize and acknowledge it.

*The image above was taken from the 2008 Risk Capital Report: Wisonsin prepared by Dr. David J Ward.