The stages of funding, it is said over and over, go as follows: Friends and family, then Angels, then venture capitalists. It’s a familiar framework to any entrepreneur trying to launch a startup.
However, should every entrepreneur trying to raise money assume that oft-repeated path is actually the best path? Absolutely not. Entrepreneurs should not determine their companies’ sources of funding based on tradition or assumptions. Rather they should base them on the intention and goals of those companies.
In fact, entrepreneurs should stop thinking of funding in ‘stages’ altogether. What’s listed above are funding ‘avenues’ that should be considered simultaneously—and could also be pursued simultaneously. In a world of rapidly-developing crowdfunding sources, the way to raise money has expanded well beyond those customary staples.
As the CEO of everyStory, an early-stage tech company, I’ve faced the challenge of determining how best to fund it. Fortunately, I already had previous experience with fundraising and M&A, so I understood that a linear perspective was not the only playbook to choose from.
When deciding which channel to pursue, ignore your company’s stage of development and instead ask yourself: “What type of investor would like my product the most?”
Questioning how startups typically proceed is one way to set you apart from the legions of other entrepreneurs out there also tirelessly working to raise money. Below are examples of avenues you should consider, along with a detailed look at the one we chose at everyStory.
“What are we and who will our product resonate with?” Ask yourself this question. Then ask it again and again.
Crowdfunding is ideal for many companies, including those with simple and sometimes outrageous concepts. What would never appeal to an individual investor may certainly appeal to a mass audience. Recently, a company offering nothing but blocks of tungsten the size of ice cubes raised $500,000 on Kickstarter. The product is, literally, a heavy block of metal that buyers could put on their desks. That’s it. It has no other functions or features—and was perfectly suited for crowdfunding. It’s simple, needs little explanation and—at about two pounds—is a great conversation starter for those who own it.
Asking an Angel network or a seed-stage VC to invest in this would be unreasonable because there’s almost nothing to evaluate, market demand would have been nearly impossible to prove, and the company had no real competitive advantages.
If your concept is that simple and that easy for a mass market to understand, consider creating an engaging video that explains the product. This will provide you with the market validation needed to achieve success or reach future funding goals. It’s cost-effective, and if it succeeds, crowdfunding doesn’t require you to give up equity. Plus, this route allows you to prove that consumers want your product or service. It’s hard to argue with demonstrated consumer demand.
Seed-stage venture capitalists
Seed-stage venture capitalists are really just like standard venture capital firms; however, they are typically open to investing smaller amounts of money in companies, presumably because those companies are earlier in development and need less money to transform into something more significant. That last part is key—VCs are looking to step in during the stage in which their investment will be transformative, meaning your company is beyond a basic idea and instead is on the verge of truly scaling.
Something else that could appeal to VCs, but might not to the crowdfunding hordes or Angel networks: Complexity. They’re less likely to be afraid of a complex product that, although maybe challenging to explain, fills a market need. Many times the exact thing that makes VCs successful is having an internal core team that can evaluate complicated opportunities. Their ability to understand those concepts is a direct and lucrative competitive advantage.
‘Angel’ can mean many things: A high-net-worth (HNW) individual, an informal group of HNWs that tend to review projects together, or a formal group normally called an ‘Angel network.’
We recently closed our first round of funding at everyStory through a formal Angel network called Tech Coast Angels. We did this for four main reasons:
• Our core product: A cloud-based, micro-social network platform focused on saving and sharing family stories—was still in the development stage and not launching until the fall (it launched September 8), so what we primarily needed were investors willing to provide the financial support to help us prove the concept—that the idea of everyStory in fact resonated with consumers.
• We had nothing to ‘scale’ yet, so the VC route didn’t make sense. We also didn’t have a physical, tangible product, so crowdfunding—which typically requires some sort of ‘pre-purchase’—wouldn’t have made sense either (think Facebook, Dropbox, or Ancestry.com).
• Angel networks can provide a great opportunity to do an additional follow-on funding round prior to going to venture capital for investment. Once Angels get to know management teams on a personal level and see them execute, the investors often continue to financially support the company during future fundraising.
• We also wanted to partner with investors who would champion our vision. everyStory’s focused goals are simple—create a tool that ensures no important personal story would ever be lost again and to provide a way for everyone to share their photos and recordings privately and safely.
That final point required us to find people who believed not only in an investment opportunity, but also a cause. Angel networks are often thought of as single-minded hives. They’re not. They’re a collection of individuals with different backgrounds and, sometimes, highly divergent approaches to investment. We believed our product would find its champions in such an environment.
After deciding we wanted to pursue an investment with the Tech Coast Angels, I personally connected with several members, so I could learn how the process works before we made any formal presentations. I was transparent from the beginning that we would someday like to present, but had no interest in doing so until the idea was refined to the point that it was worthy of presenting. With the feedback from those conversations, we spent months polishing our business plan and occasionally asking for more feedback on our progress we’d made thus far.
In January, we formally applied and were accepted to present. The pre-screening in March was the first in-person stage of the evaluation process (this first stage varies within different networks). For the pre-screening, we presented to about a dozen investors and analysts for 10 minutes, stepped out of the room for 10 minutes, and then came back in and received direct feedback. We did well enough to be invited back for the screening presentation a week later, but even before that meeting, we met with a TCA member who helped us improve our presentation.
At the screening presentation, we presented to about 30 people for 10 minutes. When we stepped back in, we learned that there was enough investor interest for us to advance to the next step. Two weeks later, we met with about 10 investors who had expressed interest and wanted to ask specific questions. That process lasted about four hours.
Like the previous stages, we received immediate feedback and learned there was enough interest to keep moving forward.
Over the next six weeks, we worked through due diligence and negotiated the investment agreement as I continued to meet with the individual investors and answer additional questions.
By mid-June, we had closed our first investment round—just about three months after our first investor presentation.
I asked the team at TCA for the stats and they provided me the following:
• In 2014, TCA received 635 applications (across all five Southern California networks), and funded 24 new deals (3.7 percent) and 37 portfolio companies with follow-on rounds.
• In 2013, TCA received 661 applications, funding 28 new deals (4.2 percent) and 18 portfolio companies with follow-on rounds.
Though rigorous, we found this route to be extremely beneficial for our company. We successfully progressed through a very structured process of due diligence, which helped us prepare for later funding rounds. We also raised the necessary capital to prove that our product does resonate with consumers and meets a need that is missing from the current market. And, finally, we gained individual supporters who believe in our mission.