This is for you, an entrepreneur raising money to start the next startup, maybe in the video space, one of the fastest markets these days on the web. At times, VCs give me a call to look at companies, and I'm fortunate to be working with some amazing entrepreneurs about their product, and funding process, so I thought I would write about this.
On paper, there are three types of startups raising money:
1. Seed phase ("One day son, all of this will be yours"). This means you are the founder; you might have a team, you have an idea and potentially a prototype. You are as far away from being an actual business as you can possibly be. BUT you believe in it.
With the credibility you and your team carry to convince people your idea has the things investors look for (big market, good team, past experience, competitive advantage, way to execute ) you're going after a "seed investment," usually in the $250k range, and likely a pre money valuation of $1 million-ish (there is a trend these days to get $1.5 million for a seed investment, so you might find yourself there).
2. Becoming a business (RISKY ZONE). This is usually when 90% of the companies go bankrupt. As our chairman Bob Cohn used to tell me, 100% of the companies in the history of time always went out of business for one single reason: no more money. This is usually when you have a bigger team; you took a lot of risks; you are probably either not collecting salary -- or you do, but it can barely pay your rent; your product exists, and you have at least one big brand client. That client is either not paying you money, or paying something that you, the client and your investors know is not really "the business model" you are going to end up with. But it's enough to convince you (you, the founder) that you've accomplished enough so that you now need a serious A round to build a company. (yay!).
(I'm going to get back to this part later in this post, so please keep reading.)
3. Growth (you lucky bastard). This means the following. You're either as hyped and well-known as Justin Bieber -- a la Foursquare, Square, Path, Flipboard -- or you generate millions in revenue. If you're the first type, you are looking into a great experience, wonderful investors, amazing support from the tech community and it's really yours to lose at this point. If you're the latter, you have paying customers, case studies, you present to your board quarterly revenue reports, your head of sales actually has targets, and people in your company make commissions. You are not cash-flow positive yet, but you think you can get there. You are likely to be generating a few million annually and you want to grow. You are likely to raise $10 million and more.
The secret you should know. The second option I mentioned above doesn't really exist. I just heard a VC GP telling me this recently. He tells me that essentially as an entrepreneur, you'd better be either selling a dream or selling millions of dollars in revenue. The "in between" ship has long sailed (oops). Investors don't know how to invest in you if you're making $350k a year, ~15% growth year over year, but out of cash -- they don't. The risk for them might be too high, since you're still selling a dream, only you've raised some money by now, had some failures, some time has passed which questions your market size and execution capabilities, and you have that annoying saying: "I've tried, but it's not there yet."If you were lucky to choose great investors (and they still believe in you) - you have good chances to extend your cash. You might get diluted more than you had wanted, but (the important part) you will have your company going.
My advice is this. You want to realize this relatively fast. The notion of "revenue will follow" is really good as it means you can develop your product, try different business models and end up building a real company. However, to do this you have to be experienced enough and with enough capital to fail many times until you get there. If you're not that person, I encourage you to put "revenue" higher on your TO-DOs, and aim to skip that 2nd grade (AKA "2. Becoming a business" phase above) into the everlasting comforting and gratifying "growth" stage.
If this post is nothing but telling you the obvious, I've made good contribution.
If it's doing more -- even better.
Good luck !
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