My little precious startup idea is hungry and I want to feed it in the hopes that in a gazillion months it will pay for itself and for my therapy sessions and all the anxiety medicine I am now dependent on, so naturally, I think: Hey, VCs are going to eat this up, baby. Oh yeah show me the money.
I put my best shoes on, armed with my solid business plan I knock on the door, an analyst asks me a few questions, an associate giggles, and a partner hands me my butt and shows me the door. Well that was fast, what happened? They didn’t even get to the business plan part! How outrageous and WTF!
The giggling probably started when big bird was brought to the table. The Money. How much money do you need? A 100k? 200? A million?
Most VCs with a decent and non-tiny amount of AUM would not bother investing in a “lifestyle” idea. What is a lifestyle idea? An idea that is limited to a certain capacity of profit and growth opportunity. Think a “restaurant” or a “barber shop”
You can’t really blame them; VCs are limited partnerships that are bound to a lifespan between eight and 10 years and on very rare occasions, 12 years. No general partner in their right mind would approve an investment that stretches over a period of time and adds next to nothing to their 20%.
Now, that VCs are out of the question, there are a few options where lifestyle businesses can get the 50K they need.
1- Bootstrapping: you dig in your pockets, bank accounts, and search the couch for lose change. Bootstrapping has two great advantages: a) you maintain 100% equity of the business and b) it is the easiest source of funds.
Unfortunately, sometimes, you just don’t have the 50 or 100k or maybe you are saving your money for all the accumulating child support or paying back your bookies. In this case, take a look at;
2- The Tripple Eff: Friends, Families and Fools: great news! Your mom thinks you’re brilliant and your best friend probably has nothing better to do so they will give you the money. Not so great news: a) they are fools. They are not investors and don’t understand the risk associated with startups. b) they will view it as a personal loan, so if you’re one of the nine startups that fail you will be forever stained as the bastard who took a loan and never returned it.
3- A Bank Loan: some quasi “VC department- lol” of a major bank would finance such a small project. If not, you can acquire a business loan. Before committing your first born to collateral, please consider the following: a) bank gets senior position on your assets. b) is it a pledge of shares loan? c} a personal guarantee might come bite you in the badonk and your spouse’s badonk..
Ok, so you don’t want to serve time or sell your kidney to service your bank loan, your best bet is to talk to the angels.
4- Angel Investors: They are angels because they save entrepreneurs a lot of humiliation. Their advantages? a)they understand the risk b) they know the people who could advice them on the validity of your idea/plan and who could also advice you. c) they can write you a check tomorrow (where in, VCs would usually take nine months to close). d)they are far more flexible about their return on investment or return schedules and forms of payments.
There are other roads to venture finance, guys, so don’t lose hope if you’re broke, or your contact list does not contain any wealthy people. Hopefully when my boss deems me worthy of such knowledge, I will share it with you because I am feeling especially generous and giving*
Have a gravy weekend.
*Might be the long day+sugar crash talking.
Thanks to this I just listened to 2 hours of live Guns N' Roses videos. Thanks a lot for the productivity f*cker.
Ms. D, what is your specific vertical focus within the VC universe?
On your point about angels...I was at a startup conference this week, and the moderator of one of the sessions, who runs an angel investor collective, said that angels expect 10x returns from their investments. I found this to be somewhat funny and absurd. He might have meant that he wouldn't invest in a company unless he could see it generating that type of return, but that seems like a high target, particularly when you need to factor in the inevitable dilution that angels usually take. Any thoughts on this?
Like I said, angels are usually very flexible on return and method and schedule of payments. However, it would be only fair that they invest in something that they think will generate a high return. If my knowledge is worth anything, I would say that 10% is not that high if the angel is basically filling the gap of a higrowth business until they can actually go to a VC. But if the angel is investing in an idea that is limited (a lifestyle), then the expected returns are much less.
When it comes to dilution, it varies a lot. If your projections or trajectory is north of x amount of multiples, then yes, the angel would expect equity thinking: They need me before a VC could ever even meet with them. There are ways to avoid high equity stakes out to angels.
Are you also going to the conference in Boston this next week? It's a great opportunity to meet with a lot of individual angels and VCs alike.
He said he's looking for a 10x return on money-in, not 10%. I'd guess that 2x-5x would (should?) be more the appropriate level of expectation for an angel.
Unfortunately, I'm not going to be at the Boston conference. I was at Denver startup week this week, and one of my partners is at a Healthtech Angel conference today in the Bay Area. Gotta keep travel costs low, and I don't have anyone on my team out East at the moment. Are you based in Boston?
I can't really say if 10x is a little or a lot unless I know what your idea is, even more importantly, unless I know if the angel has prior ventures in a similar idea and what their exit has been historically. If he's smart money (i.e: bringing expertise, connections, introductions, etc) then his expectations are normal. If he's dumb money, then that's a little excessive.
I might humbly be able to give a better answer if I knew what your projections are.
[quote=TechBankingUnfortunately, I'm not going to be at the Boston conference. I was at Denver startup week this week, and one of my partners is at a Healthtech Angel conference today in the Bay Area. Gotta keep travel costs low, and I don't have anyone on my team out East at the moment. Are you based in Boston?[/quote]
I am in NYC. And good thinking on keeping travel costs low. Investors want to see you'll conserve the money as much as possible.
Here's a tip: if a VC wants to invest in you, you should probably bootstrap things and keep the equity, or keep as much as possible. -From experience.
If you have a hypergrowth cash guzzling business idea, you would probably need a lot of cash to get it going. If you can bootstrap a couple million dollars then that's great. But then all your money would be dumb money. If you need less than that, then there should be no need for you to go to a VC anyway.
In that you clearly have a good idea and shouldn't give up equity (aka future money) because you think you can't get the funding anywhere else? Just want to make sure I understand what you mean here, thanks.
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