Friday, November 22, 2013

You’re Just Not Ready for Outside Funding (and Probably Never Will Be)



As a mentor I run into many young (and not-so-young) entrepreneurs who have apparently been conditioned by what Glen Hellman refers to as the Startup Industrial Complex to take the following steps in building their startup:

  1.  Get an idea 
  2. Network and tell everyone you meet about your great idea
  3. Take the gobs of money that angels throw at you
  4. Pay yourself a big salary get a cool office and buy lots of swag
  5. Oh are there more steps?

Generally I find that most entrepreneurs I meet do a pretty decent job at steps 1 and 2 on their own.  When time for step 3 rolls around (from what I can tell somewhere between setting up an LLC and well before developing an MVP or any significant traction) the idea comes that they must now pitch angels and collect the cash.  Since I don’t hide the fact that I am a fairly active angel investor and member of Baltimore Angels, many times these entrepreneurs come to me for advice on funding.  Often they show me their ‘pitch’ which is so far off I can’t even figure out where to start in terms of advice.  It can be a really poor pitch but more importantly the company is just not remotely close to being fundable, and most likely they never will be.  That is not necessarily a bad thing.  The vast majority of new companies are just not realistic candidates for outside venture investment.  

It is a fact that not all new small companies are ‘Startups’.  As @FAKEGRIMLOCK commented on a recent Glen Hellman blog post “IF IDEA NOT INCLUDE "CAN SCALE TO HUGE MONEY WITH SMALL COST" IT JUST A BUSINESS. NOT STARTUP.” They are small businesses that can and should grow organically, funded through reinvestment of profits generated by steadily growing revenues.  This is the vast majority of small business and accounts for most of the job growth in the US.  Some of the startups I work with have sincerely and genuinely tried to follow the more ‘old fashioned’ approach of concentrating on building a small business and have asked me for (and taken my) advice.  But there always seems to be a feeling that maybe they should follow the ‘easy’ approach and just go and get angel funding.  I am often asked how they should go about this (and less often IF they should).  Some points I like to make to everyone I talk to about angel funding are:

1.       The majority of angel funded startups fail.   
2.       If you can build and grow your company without angel investment, do so.  You will be much happier in the long run.
3.       Don’t bother asking an angel for funds to develop your MVP.  I personally consider figuring out how to do that without angel or VC funding to be the first test that you encounter as an entrepreneur and the minimum entry fee for consideration of investment.
4.       The more and better quality traction you have before approaching investors, the better.
5.       Don’t approach an angel/VC unless your business is scalable and you have a business model in which the money you seek will accelerate growth dramatically. 
6.       Don’t pitch any investor without reviewing some of the many excellent examples of winning demo day pitches posted on the web.  As Paul Singh says, “Be the least shittiest pitch of all the shitty pitches”.  And remember, you are not just competing for investment dollars with the guy next door but companies all over the world.  There is no excuse for not doing your homework.
7.       Understand the economics of venture investing and how investors (must) think about this type of investment.  Paul Graham has some great posts on that topic here and here

I really want to be positive and supportive when working with young companies.  But I am really feeling now that the best way to help those seeking my opinions on angel funding is to be as honest as possible to the point of bluntness (crankyness?).  Most successful small businesses in the world are bootstrapped and seeking outside investment should not even be on the table.  Instead of following the ‘standard’ process, I think that a renewed focus on building the business and doing the required homework will better prepare companies for taking their best shot at long term success.

4 comments:

  1. Well said. We need more workers and fewer fauxpreneurs. More work and less cowbell.

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  2. "There is no excuse for not doing your homework." Amen.

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