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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?"
Where's the plug?
/. without a plug? Amazing!
You mean an actual Ask
Are usually the investors at this level. And the only way to make the connections is to start networking. Talk to your MD, family lawyer, Opto, and dentist. Work out a song-and-dance and see where it goes.
"Eve of Destruction", it's not just for old hippies anymore...
dealing with my relatives as part-owners of my business, or a horde of rapacious, money-grubbing VCs as part-owners of my business, it would be no contest - I'd vastly prefer dealing with the VCs, hands-down. ;>
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.
Try some other avenues first (we used these as well)...
- Local Chamber of Commerce.
- Tech incubators
- Small Business Administration (we used this quite sucessfully)
- State tech assistance programs (normally funds set up by the state to encourage tech sector growth)
If you do not need to grow your company now, then wait. You first need to go through a few revisions of a business plan. That alone can take a whole year. You need to get with a financial specialist to do profit forecsats (potential). You need to make sure all of your liabilites that can be reasonably insured are insured first. You need to look at all business models that might apply (corp, S corp, LLC, etc) to see what best fits. You need to get help with a professional on understanding your local market demographics. You need to take a look at what it would take to give you all required expenses and the ability to pay a loan back at twice the required monthly payment per month (your loan for the capital you need). You need to see if you can grow the current income into this amount before you seek outside financial help.The less risky you look (time and profits), the more likely you are to get a bank loan (much preferred to a VC), or better yet an SBA loan. Check to see if you have a group called SCORE (Senior Core of Retired Executives) in your local area. They are an incredible resource.
InnerWeb
Freud might say that Intelligent Design is religion's ID.
VC may be a good idea, but it probably isn't. Read these links:
- Joel on Software on VCs
- 10 reasons to shy away from venture capital
I wouldn't bet on it, personally. Consider very very hard what you're in it for, and what risks you're willing to take.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!"
1. Buy lots of bread.. put them in the toaster..
2. If the toast looks like the Virgin Mary, put it up on eBay
3. $$Profit$$
.. 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.
Read this first: Strategy Letter I: Ben and Jerry's vs. Amazon
SlashSig Karma: Excellent (mostly affected by moderatio
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.
I suggest you talk to your most enthusiastic customers and cut them a deal where they pay MORE but get some company interest in addition to whatever the hell it is that's generating cash.
/. Just sit down and think through all the scenarios, OBJECTIVELY. If you can't do this, hire a manager who can with the little $ you have and let him figure out how to get more $.
Watch the enthusiastic customer who is also a startup. I had a business KILLED by one of these who placed huge orders, never paid, filed for bankruptcy, and then got bought out of bankruptcy by the founder!! I haven't been the same since. I made me much to cynical!
I invested in anothe startup. They dragged on with angel money from here and there for some 12 years and just recently folded. I believe it was too easy for them and had there been a strong management team and a bunch of vultures dragging their asses out of bed at 5AM, 7 days a week, the comany would have prospered in the first few years.
Don't ask
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