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Raising Money for a Tech Venture?
phosphor-boy asks: "Age old story: a friend and I have a fun, part-time technology venture that's actually generating a little cash. To take this to the next level, we need to raise few hundred thousand dollars. There's good reason to believe that it has enormous potential to make money - but since it's a new concept, it's (obviously) extremely speculative, so going to the bank won't work. We've been tentatively offered venture capital funding, but would have to take A LOT more than we need ($millions!), and give up way more control than we'd like - giving up some control is OK, but we've seen firsthand how VC money can run amok, and it's not pretty. However, a few hundred thousand is more than is do-able with friends, family, and second mortgages. So to sum up: too little for VCs, (maybe?) too much for friends and family. Have any others on Slashdot faced this situation? What works here, and what doesn't?"
If you have the opportunity to close a venture deal for a few million dollars, take it. Do what you can with what control you have left, and walk off with your share of the money if you can't take the pressure anymore.
If you've made one good project, odds are you'll be able to make more. Don't be sentimental about the project and worry about control; just think about the other projects you'd be able to start-up with the money you earn from this. And if the VC does well with the project, they'll be there for your next and more ambitious idea too.
Good luck.
Beware of the following pattern:
1) You give up more than %50 of your company for the money.
2) The VC'ers put their own "crack team" of managers in place (themselves!) and pay (themselves) ourageous salaries.
3) A few months later, they have sucked all of their own capital back out.
4) The offer to buy the rest of the company for a pittance, which you accept, because you have no money and no control.
Vonnegut was right: Of all the words of mice and men, the saddest are, "It might have been."
If it really is a novel invention, you might think about patenting it. Generally speaking, patents take less money (tens o' thousands instead of millions) and that gives you some new options:
1) VC's get excited about patents - it ensures that there's a strong barrier to entry. It may make it easier to raise money.
2) You can sell your patent to another company, so you can get profit from your idea while someone else spends the capital to make it big.
If you did want to pursue this approach, I recommend hiring a lawyer. While you can patent something yourself, it's better to have an expert help craft the patent application.
Good luck.
-Peter
Most VC's expect a payback that defines usury as most of the business ventures will probably fail. If you succeed, you not only pay for your 'cost' but also all the other failed prospects. Shaking off these vermin after thing get established can be extremely expensive. - this applies to far more than the tech sector. Unless you plan to cash out, don't go there..
+++ UGUCAUCGUAUUUCU
Several *hundred* thousand dollars. That's two orders of magnitude you lost there bub.
Were that I say, pancakes?
It's called Angel Investment. You can book about 100-500K through Angels. In Austin, they work with groups (Texas Capital Network for one). Frequently, angels can hook you up with business connections. Even though you may not think you need it, they can also hook you up with some Adult Supervision. From talking with VC's first hand, before they were VC's, Adult Supervision is more important and helpful that you probably think. Use your noodle and you can probably find out how to hook up with angels.
Since I've never been in your shoes myself, I can't answer your question without asking one myself. If you're already in the black (my assumption from your post), then what's wrong with building it slowly (putting back all the money you earn into the company) and owning it all yourself? I'm not trying to be facetious here, I'm asking a serious question (please don't mod me down). If you spoke to Warren Buffet, I'd assume that's what he'd say. Then once you have a solid product, look to sell and move on with something else. There's a benefit to slow and steady -- is Warren laughing now when in 1999 his peers were ridiculing him for not buying more blue chip stocks faster?
Linux at home
It sounds like you're looking for incubation capital. Some VC's will invest in your idea if they think it might become something. Sometimes, they'll invest a few hundred grand to see if you can produce something before they sink million(s).
Good luck.
Don't think that a small group of dedicated individuals can't change the world. It's the only thing that ever has.
Are you sure that you need several hundred thousand to make it to the next step in one big block ?
Because if it is really making money already, surely you can stretch your savings (you do know that that word, right ?) and credit to get 20k, and pay that debt mostly down inside a year. Do it in steps that large, focusing on the parts that will increase the revenue stream first.
When you are within 120k, just walk in to your local bank and talk to the business loan department. With a year or more of steady income records (you are keeping records, right?) you may justify the loan.
On the other hand, if you really need the cash up front, say to have run of plastic molding done or an ASIC produced, you might be in a pickle. If you can raise 1/3 or more of the cost of the manufacturing run or whatever, try meeting with the manufacturer or fab or whatever and showing them the cash and asking for credit on the rest, or offering a non-controlling equity stake. Sometimes the manufacturer or machine-tool seller or whomever is going to receive this big one-time cost is a better source of credit than the normal banks and etc.
You are right to be wary. I have been through this myself and a lot depends on timing and structure.
If you can raise money from friends and family then that is a good way to start. It depends on your technology but since you are already making some money it doesn't look like you need a massive investment. If you have a lot of friends and family then you might be able to raise a significant amount of cash. You are better off having control distributed among more people than having a large sum come from one investor or group. As others have said you can raise money from angels (or groups of angels who act as one) but these bodies often push very hard deals and frequently want control for a small amount of cash. They will also certainly want to put someone (or more) on your board of directors.
That gets me to one of my pet hates, boards. A huge amount of time can be wasted with people trying to push a small venture up scale before it is time. Early investors can want to grow the company quickly so they can get out early and move on. These people can have very short term views and this can cause problems if things are growing more slowly or organically than they think it should.
In the end, you need to decide what size your company should get to and bring people and their money in accordingly. The advantage of VCs is that they can afford to bring in very good people who know their stuff. Some of the lower value end of the market people are rather less useful, especially if they have no really idea about the technology. This will not stop them wanting to control things and make decisions they are not qualified to make. This is why you must retain control for it to be a success, or be sure that the people who are taking over really are able to make the correct decisions.
This is likely to be a learning experience, you will probably be able to come up with new technologies which will be successful after this, that is certainly my experience. Everything I learned from my first venture has been rolled into my future plans and my approach is much more cautious but I believe I am on the right track this time and the technology I am developing is far more mature than previous work, and above all it is all under my control.
Final thought, be sure that you trust your partner. He is the most important person, other than you, to the business.
"I have the attention span of a strobe lit goldfish, please get to the point quickly!"