Upand$tarting

Part II, Getting Funded – What are Your Options?

Follow this link for the first part of the article, Part I

There are a lot of twists and turns along the path of determining whether you are ready to raise funds. I raised a number of questions that need to be answered in Part I of this discussion. Once you go through those, you should have a good idea of why and how much funding you need and what your company will look like after the funding event. This will naturally lead you to eliminate certain types of investors and favor others. Lets talk about what types of investors are out there and what each bring to the table in terms of assets and liabilities and most importantly – obligations.

Bootstrap (organic growth)

Bootstrapping your company is growing through organic means. You could bootstrap your company by keeping your day job, not taking a salary and funding development with your own money. You could also bootstrap by re-investing money from sales into product development. Either way, you will retain ownership in your venture, which gives you the ultimate control over how quickly you grow or which direction to take.

My favorite example of a successful bootstrapped venture is 37 signals, these guys have created an amazing array of products and respect in the marketplace through a combination of unique vision and product development.

Individual Investors (friends & family)

Generally this type of funding is the easiest to get, but offers the largest risk. It’s one thing to take the leap into a new venture by yourself, quite another to bring along people in your immediate circle of influence as passive investors. Taking the friends & family route will increase the need to succeed quickly and provide a return on investment.

It is critical to understand how your company will grow or if it needs to raise additional capital down the line. One of my companies had initial F&F investment, once the company brought in professional investors, the original investors (mainly family members) ended up getting squeezed out through dilution. You can’t ignore that the fact that Thanksgiving Dinner will taste differently when the other people around the table have a portion of their retirement in your company.

Angels (singly or as a group)

Angel Investors are generally high net worth individuals who have succeeded in business. As a result, they are looking to invest their money in something that will allow them to share their skills and experience in a more active way than tradition investing. Angels are usually introduced to the company as individuals, but may also be part of an Angel network that pools their money for investment.

The great thing about Angel Investors is the business experience they bring to the table, provided that you have successfully done your homework and their experience aligns with your company’s challenges. One caveat, an Angel will not be a passive investor, requiring much more communication and may cause challenges in raising additional types of investment. Their goals may be different than yours and institutional investors.

The company I am currently working with started out with Angel investment. They have both an Angel Network and a host of individuals. Angels sit on the board and vote on high-level decisions such as investment in product development and funding.

Incubator (seed investment and a little more)

An incubator is a combination of a venture capital group specializing in early stage investment that provides a basic level of infrastructure for your fledgling company. It is usually attractive to a certain type of start-up, very early stage with out an experienced founding team. A seed investment is generally enough money to establish proof of concept or create a prototype of your product. It is milestone driven and is generally just one investment round of many that your company will likely seek out.

This type of investment comes at a higher cost that what we discussed before (and after) due to the higher risk associated with the outcome and the additional services that you will receive.

Generally, you can expect a home for your company (enough for a handful of employees), operations infrastructure such as shared common space, administrative support and legal support.

This type of investment, along with traditional Venture Capital, pushes your company along a well-defined path. Unless you are starting this company to create a profitable exit (whether it is IPO or acquisition) then you will have to look elsewhere.

Venture Capitalists (professional investors)

Venture Capital has been the cornerstone of our economy over the last couple of decades, responsible for the funding and growth of many major companies. Google, Amazon.com, Facebook and Twitter are just a couple that spring to mind. The wild success and willingness to take a risk on promising ideas has had the effect of lining Entrepreneur’s fantasies and realities. The funny thing is, Venture Capital isn’t that easy to get. Sure, there are stories of the two college aged founders with a great idea that captured Kleiner Perkins money for something launched in their dorm room, but for each one of these stories there are thousands of business plans submitted without any response.

Most funding is achieved through already established Entrepreneurs who seek to duplicate their previous successes or capitalize on their expertise in a different way. Microsoft and Google have produced an amazing number of Entrepreneurs who have left to start their own successful companies.

If you have an idea and have done your homework, by all means look at Venture Capital. I could and will write a whole post on this type of funding in the future.

Wrap-Up

We’ve talked about the major forms of investment that are available for your company, but by no means have we covered all of them. A few other areas to look at are Corporate Investment (companies that are either indirectly or directly associated with your target industry), Venture Debt (a hybrid debt vehicle that resembles Venture Capital and bank debt) and plain old bank debt. We’ll talk about these in the future, but this article should give you a good idea of where to spend your time and efforts when looking for investment in your company.