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Posts Tagged ‘start-ups’

Raising Seed Capital for your First Company

May 18, 2012 3 comments


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)

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10 Signs You’re An Entrepreneur

May 15, 2012 Leave a comment

YFS Magazine (“Young, Fabulous & Self-Employed”) came up with 10 signs you’re an entrepreneur. I don[t agree with all of them but aspiring entrepreneurs should think about how this fits with their philosophy. Here are some of the more interesting ones:

1. Let’s just say, there is no shortage of self-confidence here. I would certainly say that entrepreneurs are typically self-confident. Do some of them take it overboard? Of course. But if you don’t believe in yourself, you probably shouldn’t expect others to believe in you. Entrepreneurs face rejection on a regular basis. In fact, a high No:Yes ratio may actually be a good thing – it means you are pushing the boundary. 

2. You like to run things. Not much of an explanation needed here. If you don’t like being in command, it’s hard to be a co-founder of a start-up. This is totally different from micromanaging or even being involved with all aspects of your business. It simply means you enjoy managing, leading and people. 

3. It can always be better – and you make sure it is. Possibly my favorite one. When I was working as an analyst at a large asset management firm, I took pride in building models that considered varied scenarios, variables and complexity. But building an excel model and delivering a product are totally different. One can approach perfection – with the limiting factor being the inputs. The other can always be better. And that is something that great entrepreneurs subscribe to: there is no perfection, only the pursuit of excellence in delighting the customer. 

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What the Instagram-Facebook exit means for aspiring entrepreneurs

April 12, 2012 Leave a comment

When Instagram announced that it was being acquired by Facebook for $1 billion, a few thoughts immediately came to mind. First: Wow, is Instagram worth $1 billion and what does this mean for the product and for the social media titan – Facebook? Next, I immediately looked up how many employees Instagram has, how long they’ve been around, and how they got started. Like a lot of entrepreneurs (and non-entrepreneurs for that matter), I felt a twinge of envy quickly followed by joy for both Instagram, Silicon Valley and entrepreneurs everywhere.

Here was a team of two co-founders, Kevin Systrom and Mike Krieger with a vision, ambition and a dream. Both are young, recent college graduates, much like many entrepreneurs running the hundreds, if not thousands, of start-ups that receive outside funding every year. In March 2010, Instagram received $500,000 in seed financing, a rather modest amount from Baseline Ventures and Andreessen Horowitz.  The Company launched their product in October 2010 with 80 initial users, announced Foursquare integration  two months later, then reach 1 million users shortly after. Now, 1 million users is quite impressive by most measurements and by that time, most people in tech have heard of Instagram (including their larger $7 million financing round). Still, with only a handful of employees, Instagram kept appropriately lean while scaling out features, dealing with their 50k+ daily new users and releases real-time APIs that allow universal sharing on any service. Meanwhile, Facebook had been repeatedly rumored to have made acquisition attempts for Instagram. These are the stories that inspire entrepreneurs – both current and future/aspiring ones. The Company closed $50 million of funding at a $500 million valuation just days before announcing the $1 billion Facebook acquisition.

So what does the Instagram acquisition mean for aspiring entrepreneurs and what lessons can we take away? First – growth does not necessarily mean headcount. When Instagram raised $7 million in early 2011, they certainly could have hired more than 10-12 employees (their supposed headcount is “about 13” employees). Instead, they stayed laser focused on the product and business with the user experience in mind. Second – always have a number. Instagram probably had many interested buyers including Facebook. But when Facebook finally came with a “real offer”, Instagram acted quickly. For many start-up “wantentrepreneurs” – Instagram is a classic example of the bet-big, get-big mentality that is pervasive within start-up culture. Perhaps the $1 billion exit will lead to more wanabe-entrepreneurs to make the leap and start something. Or perhaps, it will simply lead to jealousy and bear-talk about another pending bubble. If there’s one thing I’ve learned since starting ChoicePass, it’s that success takes discipline, hard work, belief, passion and [calculated] risk. For most people on a paycheck, seeing Instagram sold for a large sum of money is the equivalent of winning the lottery for them. But for those aspiring entrepreneurs with a great idea, this might be the push that gets them to start. Maybe they too can create the next Instagram. I’m happy for Instagram because the founders stayed true to their vision and executed beautifully in a space that they were passionate about. We can probably all agree that a photo-sharing app with filters isn’t going to be on the top of our list of “most innovative” new products. But Instagram’s zero-to-one billion story resonates with entrepreneurs because of this simplicity. Try to do one thing very well instead of a dozen not-so-well. Focus on reaching your milestones. Stay lean. And most of all, remember to have fun.

Zero to 1 Billion - Infographic