Last week I was the guest of honor for a live chat on a popular business blog. The blog's editor, Jennifer, suggested we talk about launching a new business, something I happen to be in the middle of doing right this very minute.
As is always the case with these chats, the questions that came up helped me see a whole other side of the process and really explore the reasons behind the moves my new startup is making.
The chat got underway, as most new start ups do, with a questions about funding:
How does funding play a role in your entrepreneurship?
It stands to reason that this was one of the first questions that came up. No matter how fast your car is, without gas it’s going nowhere. My new role in Sessionville has had me thinking about funding since the very first day. And if you are in a similar position, start by asking yourself these questions:
How much money will I need and when?
The trick of this game is figuring out just how much funding you need at any given stage, versus how much equity you’re willing to give up.
On the one hand, you don’t want to fall into the 90% of businesses that fail due, in part, to underfunding. Even on a shoestring budget, creating a new startup is rarely cheap. Dealing with talent, technology and the cost of goods sold can bring a new company to its knees before you even get started with marketing and growth.
On the other hand, selling equity too early takes options off the table. Getting in bed with partners, angel investors and venture capitalists adds cooks to the kitchen at every turn. A good entrepreneur knows that the purity of an idea—and the people who execute it—can be the difference between success and failure.
Am I ready to pitch?
In a perfect world, you’d be able to walk into any investor meeting, perform a Vulcan mind-meld with your potential investor and have her understand beyond a shadow of a doubt just how brilliant, far-reaching and doable your idea is.
The reality is that the gatekeepers of funding are naturally circumspect in the presence of startup founders and our “we’re all gonna be rich” schemes. In order to get the keys to the castle, you need to walk into that meeting with a sober view of your startup’s needs, capabilities, position in the marketplace and chances of success. Putting together a presentation that provides answers/best guesses to all the big questions is no small part of the job.
What type of funding is right for my startup?
Knowing which type of funding best fits your situation will save you a lot of time, effort and disappointment, so spend some time doing the research.
A great way to get your feet wet with funding is through an incubator. These are small funding opportunities (usually $25,000 to $150,000) and often come with a mentor, some office space, technology like computers and servers, and/or a pier group of like-minded entrepreneurs.
For most startups, stage 2 comes in the form of angel investors. This can mean friends and family, or it can be an organized group of investors who want to be part of the next big thing, and don’t mind taking on some risk to do it. I’ve seen angel rounds bring anywhere from $250,000 to $12 million into a startup.
The big dog is venture capital (or VC). These are professional investors at the top of the food chain, like Marc Andreesen, co-founder of Andreesen Horowitz, the VC fund that brought companies like Fab, Facebook and Foursquare to life, just to name a few. At this point you’re talking about enormous sums of money and a board of directors that’s going to be serious about growth, management and their return-on-investment.
Whatever you do, your very first step is to find a quiet place, imagine every inch of the company you want to create, and start planning for success from your first laptop to your 200th employee.