Big Paper Blog

So, there are a lot of myths about funding, and the biggest one is regarding the types of funding (bootstrapping, FFF, angel, VC, bank, etc.)

For the record, here’s my take on the types of funding, and a checklist of basic requirements that apply to YOU if you are considering pursuing funding dollars from any of these sources in order to build your company.

1. Bootstrapping

Bootstrapping means building the business with NO funds– just bootstraps. Think MacGyver.

So when you sit down to make a budget as a bootstrapper, you put a big fat $0 next to:

• Income
• Expenses
• Personal Salary
• Bills

As a bootstrapper, your approach to spending money is, “We don’t need no stinking money!” In other words, bootstrappers can always, always figure out how to “buy” or do something for nothing, and they follow the old pioneer slogan closely:

“Fix it up, wear it out, make it do, or do without.”

ALL entrepreneurs, every single one of them, would retain far more equity in their companies (and thus potentially become wealthier in the end) if they asked themselves,

“How can we get by without this purchase?”

If there is a [lega] way to skip purchasing something/some need, and keeps momentum moving forward without distracting you from the core of the business, then do it!

If there is no good way to get by without the purchase, then you may actually need it. But the true bootstrapper will then assess, “Is there a way we can beg/barter/steal this for next to nothing?”

In essence, as a bootstrapper, you become the quintessential garage-sale shopper; hey, it’s good for the soul.

Requirements for Funding Via Bootstrapping Include:

• You have no revenue
• You have no stable revenue flow
• You are running out of money
• You have no functioning product that customers can use
• No one is showing legitimate interest in investing (anything besides a “Here’s my check deposited in your bank account!” is a NO.)
• You do not have a business; you have a business IDEA.

(The difference? A business where you can currently buy a product, walk into a storefront, or pay taxes on. A business idea resides in your brain, in your business plan, and in your coffeeshop conversations, with very little tangible evidence of a product/service ready to sell.)

2. Friends/Family/Fools

This is a category of funding that is probably most abused. Those who know and love you believe in your idea, so it’s easy to get and take money from them.

However, be cautious. A failed business idea is one thing, a failed relationship/family due to unrealistic expectations of investment potential is quite another.

You should consider taking money from friends/family/fools to be just as formal a business relationship as with a “professional” investor. Give them the same information: business plan, financials, etc. Draw up a formal agreement. Do not take money on a handshake, it is too easy to add exponential stress to your life, worrying about a friend/family/fool who’s worrying about their investment.

As a general rule, don’t take money from people who can’t afford to lose it after giving it to you. Or, who you can’t afford to not repay, for financial, personal, social, vocational, or familial reasons. This includes:

• Your 90-year old grandmother’s meager savings
• Your nephew’s college fund
• A loan from your wife’s father (who has never really liked you anyway)
• People you hardly know
• Co-workers at your day job
• People who like you, that you aren’t fond of
• Mobsters, gamblers, and the like

Requirements for Funding Via Friends/Family/Fools Include:

All of the above, plus:

• A detailed business plan/action plan (even if it’s pretty basic)
• First stab at realistic financial projections
• A detailed “use of funds” plan
• Clearly delineated expectations regarding the high-risk nature of the investment, a timetable for repayment, what will happen if the funds are lost, and frequency of communication about the business’ progress.
• Written specs of some kind re: the technology
• A prototype or model of the technology in actual tangible form
• A partner in crime
• A great business advisor/mentor
• Traction of some kind: anything indicating GENUINE INTEREST from people outside of your friends/family circle.
• A list of 10 potential customers
• 10 pages of articles, facts, statistics, and research that substantiate your assumptions about your target market
• A conversation from you to them, that you both recognize that a. investing in you is fun, but there’s a 50-90% chance they’ll lose everything and end up despising you; b. that you will try as much as humanly possible to spend their money wisely in areas that will build the business, and c. that if the business fails, you hope you can still be friends/family

3. Angel Investors

As compared to the F/F/F category, angel investors are the least abused, and most misunderstood group of funding sources.

From my conversations with dozens and dozens of entrepreneurs, the most commonly held perception of an angel investor is the following description:

“Angel investment is the easiest type of funding to get. It’s a nice, old, experienced businessperson who enjoys investing in promising young startups. We just need to find some angels to talk with, and I’m sure they’ll be ready to get started.”

Nothing could be further from the truth.

A more accurate description might be that angel investors are basically junior venture capitalists, but more nit-picky.

Angel investors are the tightfisted-est of all investors, because they take their own hard-earned money from their personal bank account, and place it into yours for 5 years. Trust me, they are not interested in paying off your business debt, or paying you and your team a salary, with their bank account.

By getting angel investment, your job turns into being an unpaid agent whose sole task is to be an exponential multiplier of their capital. If you work hard enough and pay them back quickly enough, you can buy back your soul and possibly get a new suit and eat out again like regular people do.

Also, angel investors are happy to meet with you indefinitely (to give advice), but are unlikely to part with their capital, and almost always invest as a pack, not as a lone wolf. So you’ll need to find not only 1 angel investor, but probably several.

“How many angels does it take to change a light bulb? None– why should they change it, when they’re counting on you to invent and sell a revolutionary light bulb factory that changes it for them?

3. Requirements for Funding Via Angel Investors Include:

All of the above, plus:

• Paying customers. Not one, but many. How many? Enough to make them say, “Wow.”
• Large partnerships in the works
• Key management on board & working well together
• Product done and being sold
• Have invested your own money
• Others (F/F/F) have invested their money
• The only reason you aren’t selling more/faster than “Wow” is because you don’t have the angel’s money to make it happen more/faster (but customers are tearing down your phonelines trying to place orders)
• Understand the basic structure of angel investing & be familiar with terms/valuation issues.
• Fine-tuned financial projections. Not just how much money you can make, but how you can make that much money.
• A management team that isn’t making newbie mistakes anymore
• Not just market validation (it works! people like us!) but a serious market need that is growing and demanding products faster than you can fulfill
• A stunning lack of threatening competitors. Good luck with this– and don’t even think about saying
  “you’re the only one doing this”, “no one else has done this before”, etc. All that means is that you haven’t Googled it yet to find out who & where.

4. Venture Capitalists

Hoo boy. This is where the rubber hits the road. VCs are also highly misunderstood, although, not in the same glossy, sparkly, heavenly way that angels are.

VCs get a bad rap, in my opinion. They are seen as aloof, disinterested, uncaring, that they string you along, and only care about money.

The core problem is two-fold:

1. Entrepreneurs do not understand the business model of venture capital.

2. VCs never say no, and they never say yes.

Because entrepreneurs don’t understand that VCs actually invest other investor’s money, they misperceive that all VCs are filthy rich and just don’t give a damn. Not always true. (Sometimes they aren’t filthy rich. )

So what happens is that every entrepreneur on the planet has seen the Big Idea show and thought, man, I should pitch to investors. VCs. Because VCs have the most money. “Hey Mr. VC, let me tell you about my startup…”

So VCs are pitched at by every entrepreneur in the state, 24 hours a day, 7 days a week. It’s exhausting. There’s too many emails to answer. Phones ring off the hook.

But it’s a catch 22, because if VCs put out a Do Not Call registry, they’d never find deals early enough. So they hire analysts as deal-screeners, to take some of the pressure off, and just ignore 97% of the entrepreneurs who email, call, stop by, or invite them to lunch.

They’re not unfeeling, they’re just inundated. Really, you should feel sorry for them. In fact, do your part to help by reading this list and committing that if the majority of these criteria do not apply, you will NOT try pitching to a VC!

Requirements for Funding Via Venture Capital Include:

• Intellectual property that has received, or is in the formal process of being approved, patents for innovative, disruptive, proprietary technology that has not been done quite like this before.
• A very carefully segmented and substantiated market opportunity of $100M or more.
• A currently operating “startup” that is already generating revenue, and substantial amounts of it (if at all possible)
• A “sexy” quality. Investors want to brag about your company to their other investor friends. “Yeah, we invested in Hotmail.” “Hotmail, schmotmail; we invested in the space shuttle!”
• Solid contracts with corporate customers like GE, Wal-Mart, Proctor & Gamble, Google, Amazon, etc. You gotta have some big names on board, baby!
• A management team smarter than the investors (essentially, they want to unbreakably high confidence in the technical/industry expertise of the entrepreneur).
• $250K in trailing revenue as an absolute minimum. Venture capital is not intended to start a startup, but to accelerate fast, money-making growth of a traction-getting, existing startup.
• Scalability, scalability, scalability. The investor will ask, “Talk to me about scalability.” This translates into: “You just mentioned getting to $75 million in revenue in 4 years. How the hell do you plan on making that happen? Computers? People? Cashflow? Marketing budget? Explain how those ramp up to actually make $75M look, well, achievable!”

The Sum Up

Well, that pretty much wraps it up! Here’s the reality: investors will meet with almost anyone, if the person isn’t too pesky. However, for 90% of the population, meeting is all you’ll get.

If you want to get results contact investors, try building a great business first, and then following these guidelines to know where you’re at.

Last, it’s important to note, “YOU ARE NOT THE EXCEPTION.” Entrepreneurs are exceptional people, however, you are not– in this arena.

The means all of these rules & requirements apply to you, whether your mom tells you you’re special or not. Please keep these things in mind and make sure you’re bootstrapping the investor’s time and efforts, as carefully as you would with cash.