“Where the money is”
Founder Friday is a weekly guest post written by a founder who is based in or hails from the Silicon Prairie. Each month, a topic relevant to startups is presented and founders share lessons learned or best practices utilized on that topic. December's topic is raising money.
Photo taken after raising a $16 million capital round to get Sojern rolling.
When Willie Sutton was asked why he robbed banks, he famously said, "That's where the money is."
Not so different from an entrepreneur looking to start a business. Business is where the money is. But most entrepreneurs go into business to build something. The money to be earned is somewhat secondary to the creation of this new thing, which is kind of nice. Obviously, to get money out of the new business, however, you usually have to put some in.
I've raised capital for three entrepreneurial ventures of my own so far in my life, and I'm commonly asked, "What is the best way to raise capital?" Lately, I have been helping some other businesses with the process and learning even more. Let me walk through the three different sources from which I've raised capital, and offer you some key insights on how to succeed:
1. Friends and Family
When I was 21, and before I knew anything about technology, an idea occurred to me for building a Family Entertainment Center in Lincoln. My vision was something like Fun Plex in Omaha but on a smaller scale (right). I had worked for a doctor in college whom I knew well. Because he knew my attitude about work and I could show him the plan and the careful research I'd done, he trusted that I could and would do what I said I would. Basically, he wrote me a check for $2 million and said, "Go build it." I did, and it was successful and later sold.
This was a great experience in many ways and a big lesson in others. Bottom Line: Friends and Family is the most common way to raise money and perhaps the easiest, but I almost never recommend it. Very often it doesn't bring value except the dollars. Other methods bring you into contact with people who may have experience and expertise to offer the business, which your brother-in-law may not have.
While my experience with this method of fund raising was largely positive, it was also an exception. Many people will attest to the fact that loaning money to friends and family, and receiving such a "loan," can and often does destroy relationships. The last figure I saw on startup businesses was that two out of three fail. If you fall on the wrong side of that fraction and can't meet the expectations of your friends and family investors, problems can and do erupt. Blood may be thicker than water, but it is not always thicker than money. The relationships may be worth far more to you in the long run than the money available today.
2. Angel Investors
In 1999, I had a partnership that did consulting. One of the partners came to me with an idea for a tax software product. We ended up raising $300,000 in the initial angel round, mostly among ourselves and from tapping our network to find people interested in investing in technology. The network was vital. We were successful, and subsequently we raised around $3 million from angels in a second round to finance growth. Again, the network was powerful. Our angel investors knew others interested in startup businesses, and the credibility of those angels led to the trust of additional investors they knew. This was a much better experience for a variety of reasons. Our angel investors brought their own business and technology expertise and their experience and savvy. They were enormously helpful. We prospered, were featured in the Wall Street Journal, and the business was later sold to Intuit in 2003.
Bottom line: Getting Angel investors is hard. It is also well worth the effort. It takes many meetings, much analysis, tolerating a lot of rejection, and ultimately requires a lot of work to please them once you have the money. However, the benefits are enormous. The process is powerful in helping to refine and develop your concept. Importantly, the experience and new contacts can be the difference-maker in your success in ways that you often don't realize until much later. A single phone call from your investor can open a door to a new customer, partner, or acquirer.
3. Venture Capital
After working at Intuit, another idea percolated for putting ads on boarding passes. After flying cross-country nearly every week for three years, I was staring at my online boarding passes with all their formerly wasted space. Why not fill that space for millions of travelers per month with something more useful and revenue-producing? Our company Sojern was launched in 2007. (Below: Early Sojern boarding pass.)
We raised nearly $19 million in the first year to get it off the ground, putting together a consortium of the top airlines in the country similar to what Orbitz and Hotwire previously had done. The first couple million came from angel investors, some of whom we had known from our successful software product and its sale. But the vast majority of our funding came from true VCs. There was a lot to learn from this experience.
Bottom Line: VC investors are the most difficult to capture, by far. They are not called professional investors for nothing. The primary way to get them even to meet you is to have someone "sponsor" you in with an introduction (see my lesson below on relationships). As you are making your pitch, you must have your numbers and the reasoning behind them rock solid, well documented and strategically sound. They challenge every assumption and drill you on the product value proposition and whether it will really work. It can feel like endless questions and doubting of your idea based on all the other things they have seen that didn't work.
If you get them to actually invest, you will spend months on legal documents negotiating business structure and terms. Then you win the right to go through half-day board meetings every month with them where you'll be grilled on your strategy, your team, the product roadmap, the sales strategy, cost structure, and more.
HOWEVER… if you have the backbone to withstand the scrutiny and deliver as promised, VCs will often get you the biggest and best exit. One of the main reasons for their capability at exit is their incredible contact network. When it comes time to sell the company, VCs often know someone who can get you to the CEO of any potential acquirer including the big guys like Apple, Facebook, Google, and Amazon. With their credibility and positioning, VCs can and often do create multi-hundred million dollar valuations at exit.
Lessons: Looking back through these experiences, I think the biggest element in raising capital is to have professional help. By that I mean the advice and counsel of people who have done it before. If It had not been for an experienced attorney named Virgil Johnson who believed in me and introduced me to people like Bill Fisher of TreeTop Ventures when I was in my late twenties, I might never have secured the angel round for ItsDeductible. Business attorneys are a great resource at your fingertips.
If you can do it all yourself, fantastic – but you still are likely to be better off finding an angel investor or VC to share the joys and sorrows of a startup. An angel investor will have some sympathy for the sorrows, a VC likely not. :) The benefit of the expertise of others helps and makes the experience of building the business more rewarding, and you'll be much better equipped to do it again in your life.
Before you start
Before you start looking for your angel, do these things:
- Flesh out your idea by tapping your network. Work with trusted friends, former co-workers with expertise, people you know who KNOW stuff, like technology, plastics, the law, banking, etc. to bounce ideas and solve key issues. (Ask them to sign a non-disclosure form if you have concerns that somebody will swipe your idea. Better yet, work with someone you trust where such a form isn't needed.) Listen to their feedback including things that feel discouraging. I've learned the single most valuable asset in my life is my time, so I will not invest my limited days on this earth in an idea unless I believe almost without a doubt I can make it succeed.
- When I help businesses prepare to raise capital today, we begin by refining the business plan over and over again using a PowerPoint deck as the medium. Forget written business plans. They are a waste of time and nobody will read them. By version 20 of the PowerPoint deck, all the questions are usually answered that any investor will want to know. Concurrently, we work on the key assumptions in an Excel model that drives the plan. We run several scenarios (low, medium, high) based on differing assumptions. Anyone can budget expenses well; the hard part is projecting revenue, and it is nearly always inflated. Beware of that. Determine what key questions must be answered to validate your assumptions on sales, pricing, upgrades, or whatever the drivers of your model may be. This is the hardest but most important part and what you must do first, otherwise no sophisticated investor will give you the time of day.
- Start looking for investors who know people in your network. There is a saying that we must build our network before we need it. I grew up on a farm in central Nebraska and didn't know a single person in Omaha, so this approach is probably the most important factor elevating my opportunities in life. You should be doing 1-2 lunch or coffee meetings a week with people from whom you don't need anything specific today, but from whom you might like to seek advice or introductions in the future. Tech guys don't seem to do this much, but you must. If you have introvert tendencies, bury them and get out of your comfort zone. Someone you would like to meet and talk to? If you can, find out what they are interested in and do your homework so you can ask good questions and be interesting to THEM. Who do you know who would have fun discussing your idea? Try to figure out how you can bring them some benefit. Can you give them some value for free? Can you build their personal website for them at no cost? Or set up and run a Facebook page for their company? Can you offer to help them with issues with their home internet network or home entertainment system? Many people with money have no idea how to make all their gadgets work, so look for ways you can help them expecting nothing in return. "The gift gives the way to the giver," so make deposits in your relationship bank before you take withdrawals. This will bring you amazing value and results in your lifetime. You're sharing, not using, which is really the way the best businesses work and grow.
Update 3 p.m.: Attribution for opening quote corrected to Willie Sutton.
Credits: Photos and images courtesy of Gordon Whitten
About the Author: An award-winning entrepreneur, Gordon Whitten established and sold several new ventures, including Income Dynamics, Inc. and its principal product "ItsDeductible" software. The company was acquired by Intuit, makers of TurboTax, Quicken, and several consumer products for home and business. As an Intuit vice president, Whitten launched several new products and increased revenues significantly in his business unit. In 2007 Whitten left the company to found Sojern, Inc. an award-winning online travel advertising business. Whitten left active leadership of Sojern (he remains as founder and a member of its board of directors) to found I See It Ventures, Inc., a VC and strategic management firm with a portfolio of startup companies. Whitten is a graduate of Hastings College and was named All-America in football. He currently serves on the Hastings College Board of Trustees.
Find Whitten on Twitter, @aceman101.
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