The Entrepreneurial MBA

One of the most common questions I get from aspiring tech entrepreneurs is: How do I go about raising my first round of capital? With Facebook going public, Spotify raising capital at a $4 billion valuation (4x their previous round), top venture funds like Kleiner Perks and Andreessen Horowitz closing new funds, and large exits like Funzio and Instagram – it isn’t surprising that a lot of people are thinking about doing their own start-up. 

Now let’s suppose you have an idea and have put together a prototype and small team for your FIRST true entrepreneurial venture, how do you go about approaching investors? If you answer yes to any of the four questions, you are at a big advantage.

1. Do you or any of your co-founders know angel investors already? Even knowing 1-2 prolific angel investors can dramatically increase your chances of raising a suitable seed round.

2. Do you or any of your co-founders know other entrepreneurs? Entrepreneurs can serve either as referrals or if they have made a bit of money themselves, could be potential angel investors.

3. Do you or any of your co-founders know VCs? The VC route is typically not recommended for pre-seed stage companies. If you know partners at VC firms, they may be able to give you advice on how to raise your round or milestones you should have before approaching investors. Early stage VCs could also introduce you to angels or invest personally because they like you. Who are some of the top VC partners? Check out Forbes’ Midas Touch. 

4. Do you have some affiliation with an Angel Group? There are some angel groups which are affiliated with certain companies (ex Googlers for example) or universities (Harvard Angels). They are typically open to very early stage companies with just a prototype.

Now, let’s suppose the answer to all four is ‘NO’. Then I would recommend exploring incubators and accelerators. Now, getting into these programs are typically not easy (Y-Combinator for example touts their low single digit acceptance rates) so I would recommend applying to all of them that fit your needs. Incubators and accelerators have been popping up all over the country so it is worth researching which ones fit your company. If you get into an incubator – great! You are at a HUGE advantage to raising capital. They will work with you, mentor you, and arguably most importantly, hold what is known as  “Demo Day” where large numbers of investors come to hear your pitch. Here is a list of some of the top programs.

Now let’s assume that you don’t get into an incubator or accelerator. How else would you be able to raise capital? Here are some quick tips:

1. Network, network, network. All of the above questions really have one common theme. It’s about who you know. If you’re currently at Google or Facebook, you are probably only 1 degree of separation from angel investor. You should make a good name for yourself so that when you gracefully exit, you could leverage your network to get introduction. AppMakr had an interesting blog entry showing their $1mm seed raise and splits potential leads into 3 categories: NEW SCHOOL, OLD SCHOOL, and TIME WASTERS. The key point here is that you should expect to go through a ton of meetings before raising your round because in a lot of ways, it’s a numbers game. With that said, you should be smart in assessing which meetings to take (if you have that luxury). His “Rule of 10” (a bit harsh IMHO) says that you shouldn’t take a meeting unless the potential investor would be open to introducing you to 10 other investors.

As part of ‘networking’, you should also be on Angelist. There are plenty of blog entries on how to effectively use Angelist. We actually did not end up using it for ChoicePass but that is definitely not the norm.

2. Have your story down. It is very important to have your 10 second pitch, 1 minute pitch, and 3-5 minute pitch down. Assuming you’re attending various networking events or even conferences, potential investors or introducers will likely first want to hear the crisp 10-second pitch. A lot of companies use analogies for this. (“We are an AirBNB for dogs”). It makes it easy for external parties to classify and assess your company. If they seem interested, you can move into your 1 minute pitch (which usually includes something like “Imagine scenario XYZ…” or “People typically do X and hate it…we are offering Y”). Then if they are really interested, you should probably have a 3-5 minute ‘pitch’ down (team, market data, opportunity and if applicable – existing investors).

3. Friends & family. It is not uncommon to ask friends and family to be part of your initial seed round. There are various pros and cons to this. If you are considering this route, I would provide some words of advice. First, make sure you know what that money will be used for and provide proper documents (e.g., share documents, note documents, etc). Second, think about how that money will help you reach your next milestone. It is probably not realistic to purely raise money from friends and family for the purposes of recruiting a team. Your first few employees should be treated like founders anyways and probably take little or no salary (unless you’re already funded). If you raise $100k from friends and family to explore a half baked idea with virtually no market validation or to hire a development team in India, the likelihood they will see their money again is pretty low and it could strain relations.

In summary, raising money is not easy. As often as you see random companies being funded on TechCrunch, you must set realistic expectations for yourself. If you have an awesome product and real users, you are at a much better place than simply having an idea. You should also set a deadline for your fundraising so you and your team can get back to work.

Some good posts on raising capital:

OnSwipe: From $1,000 to $1,000,000 (via TC)

How to Storyboard your Pitch (via Quora)

Funding your Business (via MeMe Burn)