While attending a session at Lowenstein LLP for the inauguration of the 2013 First Growth Venture Network, I had the pleasure to speak with and listen to some of NY and the Valley’s top investors. Some of this advice on how to navigate the VC landscape comes from them.
You quit your job, labored months building a product, and found some traction. Then, you looked at your bank account and thought to yourself: “crap, I’ve got two months of runway left, three maybe if I stretch it. What do we do?”
The way I see it, you need one out of a couple of things to raise money. Network, Hype, Black Bottom Line
The whole VC shabang will tell you that it’s team first, then product, then market size, then the deck, then the color yellow, and you’ll typically hear most of this crap.
The simple fact is that while all of the above are secondary funding attributes, and are taken into consideration in the funding process (except perhaps the color yellow), they, by themselves, will not get you in the door, nor will they facilitate a term sheet.
So what do you need to get that large seed round or a series A? One of the following three things.
1. Network – If you have a solid and strong network within the community, did a deal or three before and exited, you will most likely be able to get any steaming pile of dung financed.
Take the following example – http://www.adkeeper.com – something like $38m in funding for a webapp that lets you save ads for later. We can get into semantics later, but in short it’s abso-effing-lutely retarded, reason for funding however 2x successful entrepreneur.
Now I assume that you’re not in this group, so let’s move on.
2. Hype – I have many friends in the community and I love them dearly, but the sad fact is that VC’s are like sheep. If one or two like your product, no matter how bad it is, chances are they will think it’s the best thing since sliced bread.
Take the now insolvent Groupon. It was phenomenal, it was grandiose, it was world changing, …. it’s insolvent. Why did everyone think is was the bees knees? Because of the hype machine.
So how does one tap the hype machine? Get press, get people talking about you, apply for contests, if in tech – win hackathons, become the topic of conversation. Again, your product may be utter shit, but if it’s talked about – there has to be something there? Right? (Mostly wrong, but this post isn’t about good business practices, just raising doughnuts).
While the better VC’s imo will not fall so heavily for hype, the majority will, and if you manage to excel at this game expect to go well into series B or even C, while still living in the red financially.
3. Tell them all of piss off, and start generating revenues – At the end of the day VC’s are in this game for the same reason you’re in this game, to make money; and nothing is better for making money, than a product which already makes money, but could make even more of it if it were allowed to scale.
This is where you want to be, and in my most humble of opinions, you should be designing your business to generate revenues from day one. None of this, “When should a startup look to start generating cash flow?” bullshit, because, and I reiterate, you should start generating cash flow from day one; anyone who tells you otherwise is delusional, and you can tell them I said so.
You see, revenues do a funny thing for your startup, they make you sustainable, they nix your burn rate and they allow you to start paying yourselves salaries, and depending who your clients are, start generating industry buzz, a little pr here, some there, and the next thing you know, you’re blipping on the hype radar, and then they’re looking to get you into their offices, and not the other way around.
You become a hot commodity with proven market traction, biz model, and actual revenues; just about the sexiest f’ing thing you can possibly be. Think Adriana Lima of the Entrepreneurship world, and let’s face it, everyone wants a piece of DeeDee.
So to not bore you any further, I’ll end on a quote.
A friend of mine, Brent once said, “I don’t need your money. But I’ll take it”, and that – is about the best position you can be in when seeking a cap raise. And you can take that one to heart.