Getting money for your start-up is, quite simply, a huge pain in the ass. Some people are lucky enough to have a windfall of cash, or have stumbled upon a project that took off enough to fund their bigger ideas. However, many of us have to pound the pavement looking for capital when trying to do something big.
Let me start this off by saying that raising capital can be incredibly complicated and that there are more sharks in the water than friends who will do anything to buy off an equity stake, kick you out and run with the majority of the profits. Be careful.
Rule #1: Ship Something
Before you even think about asking other people for money, you need to get your teams heads together and develop some kind of product that you can demo and show a little traction in the marketplace with. Investors know now that the cost barrier to shipping a product is dramatically lower than it used to be. Hosting is much less expensive and you can outsource many of the small tasks (quick design work etc) to get SOMETHING working.
Rule #2: Know your competition value
It doesn’t matter what you think your project is worth, it matters what investors think it is worth. This number is generally relative to commonly accepted metrics and how they compare to your competition. And yes, you have competition even if you think you don’t. Using sites like Crunchbase and the trusty Google search can reveal a lot about your competition, their value and traffic levels. Did your closest competition just close an investment round with a $1 million valuation but you are beating them in traffic by 20%? Go for a $1.2 million valuation or more and work from there.
Rule #3: Don’t take the first offer
If you are really building something of interest, you are going to start getting the attention of investors early on. These bids are likely going to be for a much lower valuation (since it is before significant traction) and will results in you giving up more equity early on that is logical. This offer is usually a lot less capital than if you simply held out for a few more months to establish some additional traction that drives up your valuation.
Rule #4: Don’t bite off too much at the start
Investors know that it takes about $100k to create a killer website (including paying for your time), so when you are assessing how much investment to take only take what you need plus 15%. The 15% is because it usually takes longer and costs more money to get to your goals than you originally think. Developers are notorious for taking too long and going over budget, so as a project manager/ceo you need to account for this. By taking only what you require to get to the next level you stand a higher chance of becoming cash flow positive, taking more money at a higher valuation or at the very least not losing as much of your investors money if it doesn’t work out.
Rule #5: Have an exit strategy
I don’t care how good or bad your idea is, you need an exit strategy before taking a single dollar in venture/angel money. You better be able to detail what kind of return the investor can expect and when. Additionally you need to be transparent about the risk involved with your investment. Being open and honest is appreciated by most investors and should help foster a relationship of trust when moving forward. From a statistical standpoint you need to realize that you are probably going to fail at your company, but if you work your ass off and the right people come together in the right market at the right time you might have a tiny chance of making it work. This is just reality, but stay strong; as Ghandi said “What you do is insignificant, but it is significant that you do it.”