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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?"
Most people can't easily give up control of they're pet projects. My advice would be to take the money if ur not loosing completle control, but ONLY if this will be the only time you'll really need to do a VC round, when you get into Bridge Funding and 3rd VC rounds, that's when you'll really start to see lack of control. From what I've seen, if possible don't take any VC money if you want control, or take it in one lump to save yourself the hassle (ie the exessive money is good, just don't go nuts, and put it aside for further R&D)
Happens in public traded companies too. They bring the company public, give themselves options at 1/10th the price. Sell the stock and then sell the company.
.bomb, salaries would be set in stone. CEO's don't need multi million dollar golden parachutes, they should be tied to performance just like everyone else.
My favorite is when CEO's give large contracts out, then go work for the company later. [wink] [wink] nobody notices....
Really is an eye opener when you see how bad corporations can be, pet projects for friends, consulting companies for payback, buying excess equipment or wrong equipment on purpose.
Also, the multiple budgets are amazing little tricks, cant buy new hardware for X, but you have extra money in this budget Y. And then the company looses customers. They get so large they just cant operate, and have to aquire to keep alive.
I think if I ever start another
.. from someone having been there..
* If you expect to have any control over the venture, you need to have your management team in place and solid. If you're an individual, forget about VC. VCs typically don't get involved until you've already got your venture running and are grossing more than $1M
* If you're just getting started, you probably want tier one, aka "Seed capital" aka "Angel investment", which basically translates to finding someone with some money to burn that believes in your project; this could be family & friends or some rich person who has an interest in what you're doing. The best way to solicit T1 money from strangers is to put together a business plan that has a clear exit strategy for the angel investor when the time comes for the next tier of funding.
* Ultimately, this whole deal is a catch-22. Most people who have money either want majority control, or won't be interested until you've proven that your idea is marketable and profitable, in which case, it may be less critical for you to need capital.
* If you have an idea that you think is profitable, but have not deployed it in any manner to demonstrate that the concept is practical and marketable, then the value of your venture is ZERO. Unproven ideas are worth virtually nothing. Everyone on the planet thinks they have the world's greatest idea.
* Don't discount the potential of soliciting government grants or regional business development deals, especially if your idea is unproven -- often these types of deals require more salesmanship than practicality.
* Sad but true. Often the entities that would most benefit from exploiting your idea/tech/service are the ones who can't be bothered with you UNTIL you embarass them by demonstrating that your idea kicks ass. You usually don't get the attention of major players until you're pissing other companies in your industry off. Your best bet is if you have companies being serviced by a potential investor/partner that represent your target audience, you should target them and try to get their attention that way.
I actually agree with you on this. Living in Germany, I've heard of people getting turned down for loans because they where late on their cell phone payment a few times. "Can't pay a small bill once in awhile, you don't need a big bill..."
Oddly enough, I'm pretty much in the same boat as the Story Parent. I'm in the process of starting a company, but we're too large to go for a few hundred thousand dollars, we have to go the VC route. Unfortunately, one of our main issues is control of the company, so just starting to work on a dream and getting paid for it isn't enough.
Angel investors offer 100k to maybe 1m (it used to be 100-300k but times change). A friend and I had an idea for which we wrote the prototype over several years in our own time. It was good enough to get angel investing. We looked at several sources but chose a quasi-govt body in the end (this was '99). They were genuinely helpful. The next step is to get some big or strategic sales (ie to big name customers) then on the strength of that initial business, project outrageous numbers and get VC backing (to the tune of 1-5m usually).
We talked to many VCs but were happy with none or the deals they offered (basically they say "if it's so good and you need the money then give us at least 50%"). We pursued a much bigger funding deal (about $16m) but that fell through after about a year of negotiations.
Today I'm back into a 9-5 job but a lot wiser. The software still belongs to my friend and I and no-one has come out with a similar product.
A close friend also went down the same path but got 1m VC money, followed by a further 5m. Control of the conpmany went to the VCs. After 2 years the original two dvelopers had 8% each and one had been fired and the other hanging on by the skin of his teeth in a sidelined job at 100k salary whilst the VC appointed managers were on 160+100k annual bonuses+options. Too many pigs in the trough and the company died 2 1/2 yrs after starting.
Only about 5% of companies that get angel funding get VC backing. Only about 10% of VC backed company reach 5yrs age. Very very seldom there's a Cisco or such like that returns enormous rewards (though the founders were kicked out of that too in the end).
I wonder sometimes if we'd taken the VC money if I'd be happier. I'd've had to move cities and in all probability would have a huge salary for a few years (based on statistics of past VC backed companies). Instead I learnt a lot and still own the sw/idea and still have the opportunity to do something with it. Someone else might come up with the same idea and maybe I don't have the spare time now to devote to it like I did in the mid-late 90s so it'll never get off the ground again.
Tough decisions ahead for all developers of ideas trying to get them off the ground...
pithy comment