When many people go into fundraising for the first time, they donâ€™t really understand the lay of the land. As a result, they waste time approaching the wrong people. Fundraising can already be a long and arduous process, so itâ€™s important to focus.
A pretty simple rule of thumb for raising money: a VC wonâ€™t be interested unless youâ€™ve got a $1B+ idea, and an Angel wonâ€™t typically be interested unless you have a $100M+ idea.
BREAKDOWN OF THE WORLD OF VENTURE INVESTMENT
Venture Capitalists (VC)
- A professional investment firm which raises large funds from which to invest in big ideas
- Wonâ€™t be interested in less than a $1B+ opportunity
- A relatively new addition to the investment landscape
- Raising smaller funds, and investing smaller amounts than traditional VCs
- Opportunity required: somewhere between VCs and Angels ($100M-$1B+)
- Like Micro VCs, relatively new to the investment landscape, with opportunity required somewhere between VCs and Angels ($100M-$1B+)
- Leverage personal wealth or raise some smaller funds
- Often invest alongside VC firms
- A good post on Super Angels on Quora: http://www.quora.com/What-is-a-Super-Angel?q=who+are+super+angels
- Individual investors who like to invest in venture
- Have entrepreneurial or investment experience
- Typically interested only in $100M+ opportunities
- Many are part of larger Angel Groups who screen deals as one
- Individuals who are interested in venture investment, but may not have entrepreneurial or investment experience
- This does not make them “worse” than sophisticated angels – they will just think about investment opportunities differently
Incubators / Startup Accelerators
- Provide mentorship, office space shared with other startups, legal advice, and in many cases â€œrent & ramen noodles moneyâ€ (~$10k-$30k)
- Usually a ~3-month “startup school”
- Incubators gather â€œclassesâ€ of ~10 startups
- Sometimes connected to investment firms, sometimes independent
Friends & Family
- People who want to help out
PROS AND CONS OF RAISING MONEY FROM EACH GROUP
This isnâ€™t a comprehensive list, but itâ€™s a few of the key points that should affect your decision:
- Can use industry knowledge and connections to help guide your business
- Assuming you do well, will often help syndicate next round
- If they donâ€™t invest in next round, itâ€™s a signal to other investors that youâ€™re tainted
- Require a larger exit than smaller investors to reach their fund’s expected returns, so may wait longer to sell than founders would like (e.g. wait 7 years for a $1B exit rather than 3 years for a $200M exit)
Sophisticated / Super Angels
- Have similar connections and knowledge to Venture Capitalists
- Often wonâ€™t invest unless there is a â€œlead investorâ€ who they know has done full due diligence (usually VC or angel group)
- Do not usually have funds to invest in a round after Seed Round, therefore no signaling problem if they donâ€™t invest in your next round
- Like sophisticated angels, usually require a lead
- Typically won’t match startup network or experience of sophisticated angels
- If not used to the entrepreneurial process, entrepreneur must be careful about setting clear goals, milestones and expectations
- A bit of money to get you started â€“ before raising a seed round
- Amped up, constant mentorship from partners and industry experts
- Give guidance on designing your strategy, perfecting your pitch, raising money, and make introductions to investors and mentors
- Donâ€™t usually invest in seed round, therefore no negative signaling issues if they donâ€™t invest in you
- See my post about the (many) benefits of incubators here
Bootstrapping means funding the business yourself (or with your co-founders), and not taking any outside investment.
The most obvious benefit of bootstrapping is that you donâ€™t give up any of your company, and hence donâ€™t lose any control or equity. On the downside, you may not have enough money to run your company.
SO SHOULD I RAISE MONEY OR NOTâ€¦?
This is an almost religious war, and there many arguments either way made by many smart people.
For the sake of argument, letâ€™s assume that you could somehow fund your business to at least survive at some level without external investment.
To me, it comes down to this:
- If you take external investment, you will have less power and a smaller percentage of upside. However, it can add rocket boosters to your company. You may have been able to slowly grow your business without investment, but taking it could allow you to hire a larger staff, pay for marketing, and grow your business faster than you otherwise could.
- If you bootstrap, you may not build your business as fast, but you will retain full control, and a larger percentage of upside.
- So really, itâ€™s a personal choice, thereâ€™s no right answer. Itâ€™s a balance between how much money and control you want, and how much of this can be achieved without external investment.
Iâ€™ve heard plenty of stories in each direction: folks with billion-dollar businesses who saw no upside after selling all their equity to investors, and bootstrappers whoâ€™ve made hundreds of millions on businesses no VC would touch.
The bottom line is that â€œsuccessâ€ does not rely on raising outside capital, and in fact can at times hinder it. You must decide what success means to you, and understand what your business needs to get there.