Want to build a startup & raise some money? Part I

Hey all,

Some of you may have seen my post/q&a/whatever about being a VC intern here. I talked broadly about what the VC side of things is like, but I didn't go into much detail about the startup side of things. I've seen a fair amount of posts about startups vs corporate or how to start a company, etc-, so I thought I'd chime in with some of what I've seen and some advice, primarily on the funding side, that I can try and give those of you who are looking at the startup world. This will be broken up into two parts as it’s pretty long & I wanted to get some of it out before starting the next one. This one will focus on the basic intro about startups and funding. I’m happy to incorporate anything else you’d like in the next one - just drop a comment at the bottom!

Why should you listen to me? Good question. My simplest answer is probably that you shouldn't. I don't have all the answers, and I'm certainly not an expert (I've only been here 4+ months) - however, I am working operationally with a few of our portfolio companies and I've listened in/participated in lots of pitch meetings & post-pitch discussion, so I hopefully can pass some advice/wisdom over - but don’t take my words as the only option & I hope that others will chime in with their experiences. Either way, consider this my disclaimer for you that I don't have all the answers and then consider this cliche phrase: that there isn't just one answer.

Anyways, on to the piece de resistance-ish.

Want to know more about startups/funding them?

For those of you who look at starting a company as a break from the hard life of IB/long hours, you are mistaken. You will work just as long and just as hard (if not longer & harder) when you're working at a startup. Granted - this varies to the stage of the startup. If you're CEO, expect to be putting in 80+ hour weeks. There isn't a founder/CEO that I know that doesn't leave the office at 7 and then go home, eat, and work more until late into the night. Then get up, rinse & repeat. You don’t start a company just to get better work life balances (granted, I’m sure there are some examples of this - but in the high-tech startup world, few and far between). Also - unlike other finance positions - doing a startup for the money/exit is a really bad idea. The founder has to be very passionate about the company for it to succeed (and to raise funding). This is absolutely something that we look for at the seed stage. We don’t want you to just peace out in three months (and your employee contract will be sure to have terms that change your options if so). You have to be willing to actually work 100 hours a week every week for years - it’s mentally & physically draining, so you really have to love it.

It’s also not really a stepping stone. Once you’ve run your own company, you almost price yourself out of the market for jobs (this obviously depends on how successful you were). Lots of companies may like the idea of having a CEO under their belt, but now the ex-founder of a company has to go and work under a manager/supervisor and that may not fit culturally anymore. The most common ‘exit opps’ for a founder would be to build another startup, move to another startup in a high role (COO type of deal), participate in Angel/VC investing, or to have been acquihired to a tech company [a lot of founders leave after their contract is up, however]. There is also the retire-at-30-made-it scenario, but that is less likely...

There is also the fact that a big exit is very, very, very rare. For every $19 billion Whatsapp, there are hundreds of other companies that have okay returns or negative returns (aka write downs for VCs). Then there are hundreds of other companies that don’t get to the funding stage at all. Remember, a VC is looking for 5-10x+ on its investment. That’s not to say they won’t invest in the lower end of that, but they really need to return 5-10x to their LPs at the end of their fund cycle (usually 5-10 years). It takes a ton of work, motivation, perseverance, & luck. You can have a great product and good execution, but if your timing was off to no fault of your own - you can still go no where.

Anyways, once you've started - you're going to need money. Money & People will be the hardest part to get, but the most important to grow your business. To hire people, you'll need money, so let's talk funding.

Funding.

If you’ve started your company and things are going well, but you’re resource constrained for growth - you have a few options for getting some funding. I’ll briefly discuss the main types/rounds of funding for startups:

• Family & Friends: Title is obvious. This will be the first funding you get - you borrow some money from your family or your friends, maybe just a few thousand dollars to pay for your AWS bill and buy some food etc-. You also put in your own money - it’s a big red flag to me if you haven’t spend your out of pocket money on paying for things and are just keeping it for a rainy day. You don’t have to go all in, but at least showing that you’re willing to risk your capital on yourself. This ‘round’ wouldn’t be very big, and may not be necessary if the founders are well capitalized themselves.
• Angel: Generally smaller amounts than a seed stage VC. Small equity portion - usually no board seats (or they will leave in later stages), but plenty of advice and network opportunities. Be sure that the angel is a fit for you and isn’t just a check with no other help. Angels are the ones who will (hopefully) intro you to some VCs if you don’t already have connections on your own. Ideally, you’ll want to work with an angel who has done a few deals before and has seen different scenarios before than an angel who is first starting out and doesn’t know all that much (again, depending on prior success). However, cultural fit with the angel is very important as they will be your first call, most likely, whenever anything big happens to your startup.
• Incubators/Accelerators: There has been a sharp increase in the amount of incubator programs that have started in the last few years. I’d say the most common (and one to aim for!) is Y-Combinator. It’s renowned around the world & is effectively the HBS/Goldman/'whatever you want as top’ accelerator in the startup world. Various VC firms & some universities also have their own incubators, so they are worth checking out as well. The real value here (apart from the cash given) is the connections & the various sessions that you take part of as you go through the program. You’re then introduced, and the top ones are definitely passed along early, to various VC firms for your next round of funding.
• VC firms: Most of you know what a VC firm is - feel free to check my last post here. There are a variety of rounds of funding from Seed to Series E and further. This all depends on what you need, and you don’t have to go through (most don’t) every series of funding. The quality of the fund & the partner you are with is very important here as that can make or break what you are doing. It's important to actively target certain partners that have connections you need to advance your business.
• Venture Debt: I don’t know too much about Venture Debt. Just that it’s effectively a line of credit for a late stage startup (one that is nearing exit to IPO - I know that Square recently got a $200mm line of credit, so something like that). I’d love for someone else to chime in and let me know more about it, but I presume the collateral (if there is any) comes from either the assets that the startup already has or from a convertible note - but again, I’m not sure on this!
• Bank Loans/P2P Loans: Not as common in the startup world, but still an option for funding. Banks will usually require a bit more due diligence/collateral before they would decide to lend to a startup, but some banks do as part of their small business setup. P2P loans are also an option - LendingClub is a big one in this market.
• Invoice Financing: Another way to get some financing is by using a company that pays you upfront for invoices you’ve sent out (usually, if it’s B2B - you won’t get paid for 30-60 days after an invoice has been sent out, which can cause cash-flow issues for a startup) and then will take a percentage off of that as their fee/commission. Not as common in the US, I believe, but still an option depending on the type of company that you’re running.

For the most part, those are the main types of funding that a startup will encounter. I’m sure there are many more and I hope I haven’t missed any glaring ones! Let me know what you monkeys have seen working in VC/startups.

Anyways, that’s the first part of the post. The second part will focus on how to get a meeting, the deck, your pitch (what to do/what not to do), and how you handle funding/rejection after the fact! I’ll try to get that post out soon, but let me know if there is anything else you want me to add in & feel free to add in questions below.