Entrepreneur's Advice on Raising Money

by Jason Caplain

In early June, I did a post talking about Ryan Allis' appearance on CNBC. This morning, his company iContact announced they raised $5.35m. With almost 12,000 customers, it has been no secret that iContact has experienced phenominal growth. Ryan has shared the iContact story regularly at venture conferences. Here is the presentation he did back in April at Venture 2007.

Anyway, you can check out Ryan's blog for several posts about his experiences raising capital. But here is his "Top 12 List of Advice to Entrepreneurs that are Raising Money." Thanks Ryan for sending this over to me today.

1. Get introduced through an entrepreneur or attorney to a VC they have worked with in the past. A good law firm can be very valuable for investor introductions if you can convince them your business would be a good investment.

2. Talk to multiple firms at once. Create a competitive process and seek multiple term sheets if you are able.

3. Read up on term sheets and have a good understanding of them before you start talking to investors. The key terms are pre-money valuation, liquidation preference, participation, share revesting, dividends, board size and protective provisions.

4. Be upfront about the general terms you are seeking to save yourself and the investor time.

5. Know that the pre-money valuation is only one of the most important terms.

6. Get involved with organizations in your community that can connect you to other entrepreneurs who have done it before and then have lunch with those entrepreneurs.

7. Realize that it will probably take at least 9 months to raise money from start to finish your first time doing it.

8. Realize that until you have at least $1 million in annual revenue it may be difficult to get most VCs interested.

9. Know that it may take 6 months of sustained product and revenue progress after your first meeting before a VC will consider your deal seriously.

10. Know how much money you are trying to raise before you begin discussions.

11. Know that it may be easier to seek angel funding or debt funding instead of venture capital early on.

12. Know that once you sign a term sheet it will be at least 30 days and up to 90 days before you actually close on the funds.

10 tricks to help your small business cast a big shadow

By Pat Curry

You've got the skills, the products and the services to make you stand out in a crowd. But you compete against companies with more money, more personnel, more name recognition and more clout. Fortunately, with the right technology, the right attitude and the right image, your clients never need to know that corporate headquarters is a walk-in closet.

Here are 10 ways a small office/home office (SOHO) can look, feel and act a lot bigger than it is. Some require cash; others just demand a commitment to professionalism. Together, they're an investment in the success of your business.

1. Get a real phone system.
"When it comes to telephones, associated equipment, and services, it's time to splurge," says Debra Koontz Traverso, author of Outsmarting Goliath: How to Achieve Equal Footing with Companies That are Bigger, Richer, Older and Better Known. "Buy or lease the best system or service you can justify."

The phone system for Drapkin Technology in New York includes a company directory that you can dial by name. Every extension on the system goes directly to the desk of Michael Drapkin.

"When a client calls, the first impression is they're dealing with a company," says Drapkin, who also is chair of Columbia University's e-commerce track. "I'm still a company; I'm just the only employee. A $3,000 to $4,000 system gives you functionality of a system that 10 years ago cost $50,000."

If the thought of plunking down three grand gives you hives, there are plenty of affordable options. At very least, you need more than one phone line.

"Nothing spells 'amateur' like having to say, 'Call me before you send a fax,' " says Atlanta-based professional speaker and communications consultant Marilynn Mobley.

Separate lines for home and business are the best arrangement, Koontz said. A residential line is cheaper, but only a business phone will get you into the business listings in the phone book.

If that's not in the budget, ask your phone company about getting more than one number on the same line, with distinctive rings. That way, you know when the kids can get it and when you need to answer the phone with a formal business greeting.

Also, look into voice mail because answering machines don't work when the power goes off.

2. Polish your presentation.
Whether it's a Web site or your business cards, your message should be polished and professional. Stever Robbins, president of Massachusetts-based VentureCoach.com, has seen the benefit of investing in the look and feel of both his site and his printed materials.

"I went out and bought a font that I use just for this one thing," Robbins said. "At first I thought, 'Wow, I just spent $500 on a font. How stupid is that?' But I've been uniformly told my package is among the nicest people have seen."

Among the most common mistakes home-based companies make, Robbins said, is using Web sites and printed materials created with cheap template programs. This is a job for pros.

"Unless you have external reason to believe otherwise, you're not a designer, you're not a writer, and you're not a user interface designer," Robbins said. "Those are the three things people think they're good at, and they're not. I've developed a lot of respect for professionals who do their jobs well."

3. Use technology.
Many SOHOs stay organized with the help of Palm Pilots; and application service providers (ASPs) such as HotOffice.com help small companies access the high-cost technology that often gives big companies the edge.

"Most companies don't have IT or MIS people," says Mickey Freeman, senior vice president of marketing and sales at HotOffice.com. "Software is expensive to buy and install. With a Web-based service, you can rent or lease it. It's leveling the playing field for companies that would have had to plunk down $15,000 to $20,000 to set it up."

Michael Britt, president of Computer Clown in Virginia, sells computers and peripherals, provides software training, designs systems and sets up small offices. He's also a professional clown. Among other things, he uses HotOffice.com to access documents and PowerPoint presentations from the road.

"The more professional I can make my business look, the better my opportunities will be," he says. "If I'm in the field and don't have a price list with me, I pull up HotOffice and say, 'I can get that for you.' If I need to create a business letter, I can make myself look good."

4. Incorporate.
"YourBiz Inc." carries more weight than simply "YourBiz," Robbins says. It also cuts out 1099 processing, which signals that you're a sole proprietor. If you don't want to deal with separate income tax returns and quarterly reports to the IRS, unemployment fund contributions and annual registrations with the state division of corporations, at least use a DBA.

5. The right address is everything.
If you have an address that sounds professional, use it. If, however, you live on Pleasant Hill Road or Periwinkle Lane, you might want to consider renting a post office box or a box at a mailing service company. In any situation, Traverso suggests adding a suite number.

6. Use the royal 'we.'
Always use "we" when referring to yourself in discussions with your clients or prospects, says Tanya F. Hilleary, president of Virginia-based Riverbyte Communications. Also, never make big decisions on the spot. If they say, "Well you're the president, can't you make the decision?" say, "I need to consult with my executive committee on these matters," and let it be that. "The executive committee may be your pet spaniel," Hilleary says, "but at least you're not getting bullied by a client because you're a small shop."

7. Meet on their turf.
Unless your space offers some unique advantage for a meeting, don't meet clients at your office. Go to them, or borrow space at an office to meet. If you take a client to lunch, Mobley suggests using a corporate charge card to pay for meals with clients. It's more impressive and makes your expenses easier to track.

8. Accept credit cards.
People don't expect that from a sole proprietor. Besides, if you're doing business on the Net, you're dead in the water if you don't.

9. Consider a toll-free number.
It says you want people to inquire about your company, to the extent you'll pay for the inquiry, Mobley said.

10. Exceed expectations.
"Answer their questions before the question is even asked," says Eliza Taylor, president of Eliza.com, a Web company that sells unique art and gifts. "We have live, online help, e-mail and an 800 number to do orders. Our key message is customer service, making sure each time they come, it's an experience that's a positive one and one they can pass along to their friends."

Titles in a Startup

by Jason Caplain

An entrepreneur emailed me late last night and asked what I thought about a startup company not giving titles to their employees. In the example he presented there is basically the founder/CEO and then there is everyone else.

So, my response was that it depends on the size of the company and also the people involved.

When a company is launched, I can't say that I jump up and down fuming the company doesn't give titles to their employees. I think it is more important that everyone understands their goals, their role at the company, what everyone else is responsible for and everyone is held accountable. At Red Hat, I don't think everyone had titles until we reached 100+ people or so. It didn't bother me.

But the way I look at it, as a company scales, titles work even better. I also like titles when employees interact with the outside world. Customers and partners want to know who they are talking with.  I think that part is actually the most important.

Don't forget to look at venture debt when raising a new round

We all know the story - it is incredibly cheaper to start a web-based business versus 5 years ago with the rise of open source software and commodity servers.  However, while getting started with thousands of users is cheap, scaling to significant numbers will require some dollars.  The good news for you and for venture investors is that your buck can go alot further today versus yesterday not only because of the commoditization of infrastructure but also because the venture debt market is alive and kicking.  In the last six months, we have augmented some of our existing venture financing with venture debt as the market has become quite competitive which means pricing and terms are getting more attractive for  all of us.  In addition, while most associate venture debt with investments in companies with core technology, more and more venture debt firms  are back and willing to offer capital to earlier stage web-based companies with  no  financial covenants and MAC (material adverse change) clauses.   Of course the more flexibility you have with respect to uses of cash means that pricing will go up.  All I can say is when evaluating your company's cash needs and potential runway, looking at the venture debt market is not a bad idea.

There is also another market metric that is driving a renewed interest in web-based companies for these lenders- they are getting funded by VCs (venture debt lenders mostly like to do deals with strong financial sponsors which increases their likelihood of getting paid back) and these startups are better able to manage their burn rates reducing risk and offering lots of upside.  Sure, while some of these venture debt firms recognize that web-based businesses may not have as much hard and true intellectual property, the fact that they are more capital efficient and can scale more rapidly means they can also generate pretty nice returns from the warrant portion of their deal.  Getting in earlier also allows these venture debt firms to buy more of the company from a warrant perspective than getting in on later rounds.  The trick for entrepreneurs is to look at bringing on debt concurrent or soon after your close of equity financing. 

Why can raising venture debt be great?  It is quite simple -  the dollars are relatively cheap compared to an equity financing  and extending your runway to hit more critical milestones means a potentially better valuation for your company down the road.  And of course if you exit before raising another round, there are more dollars available for the equity holders.  A typical structure for an early stage deal could be an equity raise of $3-5mm with another $1-2.5mm of debt.  From a pricing and terms perspective, you should look for capital which is flexible in terms of use for true  growth capital (growing your business) with no financial covenants or MAC (material adverse change clauses) which can put more risk into the debt equation.   Of course, the more flexibility you have, the higher the interest rate will be relative to other types of loans. Most venture debt deals will have an interest only portion for a short period of time before amortization (monthly payments of principal and interest kick in).  Typically you will see terms of 30-36 months where your lender will get paid his full portion of the loan and interest by that time frame.  In addition, lenders will ask for warrants equal to a percentage of the dollar amount raised (for example, depending on the deal, a 5% coverage for $1mm could be equal to $50k of equity to be purchased at the current share price).

All is not rosy as there are some potential and hazardous downsides to this model.  If you burn through your cash and can't make the monthly principal and interest payments, your lender can take over your company as their debt is usually secured against your company and intellectual property.  Trust me, a number of companies got burned with this during the Internet boom when their businesses were based on wildly inflated revenue projections and unilimited capital resources.  Just when you needed another month or two to sign that strategic deal, the venture debt guys would come in and pull the rug from under you.  Granted it is not that bad as your lenders are your partners and will negotiate with you, but at the end of the day, if they see their ability to get paid in significant jeopardy, they will do what they have to do to recoup as much value as possible.  For some investors and entrepreneurs, this risk may not be worth the dollars.  For others who are confident in their execution and ability to raise another round, there is no better way to stretch your dollars in the company and create more value with minimal dilution.  So the next time you hear the word "debt," don't be scared and keep an open mind as you may be able to stretch your resources further and achieve some additional critical milestones driving increased value in your business.  The interest in web-based businesses is there and the competitive market means that pricing and terms are pretty attractive now.

Sold to the highest bidder

By Brian McConnell

A few months ago, I decided to publicly list my company, Open Communication Systems for sale. I'd like to share the experience.

OCS builds a suite of group communication tools that make it easy for users to create groups about any topic, and then communicate via web, email, conference calls and other media.

We're about two years old now, have been in beta for a few months, with a total investment of $225,000 ($125K in angel, about $100K of my own money). We're a local call in several dozen countries. Not bad for a little bootstrapped company.

I decided to investigate a sale because telecom is still a capital intensive business. I wanted to focus on designing the product, while someone else worked on marketing.

I decided early on I'd rather sell my company and go work for a new boss, or not at all. I didn't want to raise venture capital. The problem with VC: You're half-selling your business, and there's risk they'll overestimate demand, pressure you to grow it too fast and cause it to implode.

Before I set about putting the company up for sale, I worked out a list of criteria that went something like this:

* Deal value between $5 to 10 million dollars. Conferencing is a good business. People pay for it. I knew that with proper marketing support, we could make numbers to support this price, maybe better depending on the buyer. Earnouts would be a big part of the package.

* Buyer should be doing something related to communication, either online, via phone or some combination.

* Buyer should leave existing team in place, some travel ok, but I hate commuting, and relocating, even to the south bay was a deal killer. Cars make you fat and unhealthy.

* Buyer should be a public company with liquid stock, or offer a cash deal. I sold my first company at age 28, went home with a million dollar check. That was a good experience. I sold my second company to Visto Corp, a bloated VC backed "pre IPO startup" that raised over $250 million. I ended up with 500,000 worthless Visto shares that were rendered valueless in a "pay to play" round. Never sell your company for shares in a VC backed startup, there are just too many ways you can end up playing the role of Rube Suckerman in that story.

* Acquiring company should be a fun place to work that rewards creativity.

* As I am somewhat of an oddball even by San Francisco standards, buyer should have a corporate culture that allows for individualism.

One of the lessons is that the biggest factor in a successful sale is if someone on the buy side gets excited about your company and product.

Several months into this process (we'd talked to many small and large companies), we were contacted by Virtual PBX. They allow you to outsource your business telephone system and replace an expensive PBX and call center equipment with an inexpensive hosted solution. Our groupware and conferencing platform was a perfect fit for them, while they had exactly the business sales and infrastructure we were looking for. They liked our web and VoIP engineering expertise. Fairly quickly we determined that an acquisition and team hire made sense.

Virtual PBX, like Open Communication Systems, is a private company. They more or less created the hosted PBX category, and have bootstrapped their way from a garage operation to a 25 person company with strong revenue growth. They’re ten years old, profitable, and never did a VC round or took on any debt, which is very unusual for a telecom company.

We looked at their business saw a big opportunity going forward: Virtual PBX and its peers could become significant businesses as customers switch from outdated intercom systems to hosted IP services.

Our deal was a simple cash plus revenue share deal, with an expected value of several million dollars with no maximum. Our product, a flat-rate conferencing service that is a local call in over 30 countries, is a product that they can sell effectively. With the deal we negotiated, I can also work 4 of 5 weeks offsite (I live part-time in South America), and will have time to work on my non-profit and open source projects.

We have a long-term budget for development equivalent to a small VC round, which will last several years, and all of the facilities we need to build a killer product.

Our deal is not a blockbuster deal, but we're a small team and it's fairly priced for our company's stage of development. With an estimated value of several million dollars, possibly more, this is a good outcome for a $225,000 investment, and in line with our expectations going into this process. We won't be buying 400 foot yachts, but we'll do well.

It wasn't an easy road. We built all of our products with only $125,000 in angel funding, plus another $100,000 of our own money. We had a couple of "near death experiences". Several times we thought about punting when money was really tight, but we kept at it and got the product launched.

My advice to entrepreneurs is simple, and that's to focus on building products that customers are willing to pay for. Next, resist the temptation to believe overly optimistic forecasts. Maybe you're working on the next Google, but it's more likely you're working on the web's equivalent of your neighborhood stereo store. There's nothing wrong with that, so long as you're realistic about demand, and about your personal goals for the business.

You might not retire at 30, but building a sustainable business is a rewarding experience, especially in an industry like ours where a good product can reach people in all corners of the world.

Exit Strategies - VC vs Buyouts

I haven't written in this series in a long time, but one of my readers recently asked me to comment on the differences between exit strategies of VCs and Private Equity buyouts. Let me first say that VC firms and LBO shops differ in their strategy and culture.

Some venture firms are old school and want to create long term value while transforming the way the world works. Some venture firms are just about the exit and the ROI and really don't give a hoot about the business other than providing a nice return so they can go out and raise a bigger fund. Similarly, in the buyout world, you have old school corporate raiders in the style of Gordon Gekko that love to carve up companies for the value. You'll also find a lot of very conservative buyout guys that like to build businesses and create value for shareholders. Typically, they will provide a nice piece of equity infusion for the company to then acquire complementary businesses or fund new projects. As you can imagine, the lines may blur between conservative LBO investors and aggressive venture investors. Those venture investors that use debt offerings sure do look an awful lot like conservative growth equity LBO players.

In my opinion, the important difference between the VC and buyout in terms of exit strategy and liquidity is that while both of them have a clock ticking, there is a different expectation, urgency, and ultimate multiple goal between the two. A venture firm must provide returns to its investors and has a long horizon to do so. Therefore, it has to make a high multiple on its investment and must hold out for a nice acquisition or an IPO. So it must build the business from scratch to be able to carrry a very high enterprise value.

On the other hand, a buyout firm, while it does have investors to report to, uses leverage for its transaction so it must pay off its lenders and service debt. Thus buyouts are bank driven deals. A bank won't lend a venture fund money to invest in a startup because it knows that it will probably go down in flames. A bank will lend a buyout fund money because there is collateral in place, and that collateral comes in the form of a company's cash flow and assets. So a buyout fund will seek companies that are undervalued with high predictable cash flow and operating inefficiencies. If it can improve the business, it can sell the company or its parts, or it can pay itself a nice dividend or pay down some company debt to deleverage.

The essential difference is that the venture funded company has little to no debt because it has issued equity. The buyout funded company has issued equity and loaded on debt.

As for the actual exit, a venture fund will usually go for the IPO or acquisition. The highest valuation will usually be what is available on the open market and that is why a venture fund will try that route first. A buyout fund will go for either of those but it also has the option of paying itself out some cash or of selling off parts or of selling in a secondary buyout to another firm.

I hope that answers some questions and feel free to ping me any questions.

What are Supra Pro-Rata Rights?

by Brad Feld and Jason Mendelson

Q: Can you explain what supra pro-rata is? It seems to be showing up in some VC term sheets now. What's the impact on the entrepreneur? How hard should one try to negotiate it out? If a VC insists on this term, should the entrepreneur walk away?

A:  (Jason)  First of all, for those of you who want a refresher on pro rata rights, see our prior post on it here.  As for what is "supra pro-rata" it is a multiple of a 1X pro rata right.  So, if I own 10% of the preferred, I normally will have the right to buy 10% of any future securities issued by the company.  With a supra pro-rata right it is normally 1.5, 2 or 3X. In our example, a 2X supra pro rata right would allow me to buy 20% of the next round.

This isn't a very common term, unless you are dealing with very early / seed stage financings.  You'll see in some cases where a VC seed funds a deal with a small amount of money.  It is normally the intention of the VC to lead the first real venture round, but in order to protect itself (in case the entrepreneurs decide to take funding from someone else), the VC will ask for a supra pro rata right.  Although the seed deal doesn't represent a lot of money, it does represent a lot of the VCs time, so they want to make sure that they can stay in the deal.

If your financing is a "regular" full blown round, then I would say this is a rare term. 

As for my advice on "walking away," there are very few terms that I consider "walk" terms.  If you need the money and don't have other options, get the money. 

(Because I know that I'll get the question, if I was on the entrepreneur side, I'd walk from poor valuation, overly aggressive liquidation preferences, over bearing board and voting controls and VC board members who expect compensation to join your board). 

Top 25 Alternatives To Venture Capital

by Business Fund.com

If you're struggling to find success in your quest for venture capital, maybe you're looking in the wrong place. Venture capital is not for everybody. For starters, venture capitalists tend to be very picky about where they invest. They are looking for something to dump a lot of money into (usually no less than $1 million) that will pour even more money right back at them in a short amount of time (typically 3-7 years). You may be planning for a steady growth rate as opposed to the booming, overnight success that venture capitalists tend to gravitate toward. You may not be able to turn around as large of a profit as they are looking for in quick enough time. You may not need the amount of money that they offer or your business may simply not be big enough.

Simply put, venture capital is not the right fit for your business and there are plenty of other options available when it comes to finding capital. From angels to credit cards, here are 25 alternatives to consider when it comes to funding your business.

1. Angels

Most venture capital funds will not consider investing in anything under $1 million to $2 million. Angels, however, are wealthy individuals who will provide capital for a startup business. These investors have usually earned their money as entrepreneurs and business managers and can serve as a prime resource for advice on top of capital. On the other hand, due to typically limited resources, angels usually have a shorter investment horizon than venture capitalists and tend to have less tolerance for losses.

2. Private Placement

An investment bank or agent may be able to raise equity for your company by placing your unregistered securities with accredited investors. However, you should be aware that the fees and expenses associated with this practice are generally higher than those that come with venture and angel investors. You will likely receive little or no business counsel from private investors who also tend to have little tolerance for losses and under-performance.

3. Initial Public Offering

If you are somehow able to gain access to public equity markets than an initial public offering (IPO) can be an effective way to raise capital. Keep in mind that, while the public market's high valuations, abundant capital and liquidity characteristics make it attractive, the transaction costs are high and there are ongoing legal expenses associated with public disclosure requirements.

4. Bootstrap Financing

This method is intended to develop a foundation for your business from scratch. Financial management is essential to make this work. With bootstrap financing you're building a business from nothing, which means there is little to no margin for error in the finance department. Keep a rigid account of all transactions and don't stray from your budget.

A few different methods of bootstrapping include:
Factoring, which generates cash flow through the sale of your accounts receivable to a "factor" at a discounted price for cash.
Trade Credit is an option if you are able to find a vendor or supplier that will allow you to order goods on net 30, 60 or 90 day terms. If you can sell the goods before the bill comes due then you have generated cash flow without spending any money.
Customers can pay you up front for your services.
Leasing your equipment instead of purchasing it outright.

5. Fund From Operations

Look for ways to tweak your business in order to reduce the cash flowing out and increase the cash flowing in. Funding found in business operations come free of finance charges, can reduce future financing charges and can increase the value of your business. Month-by-month operating and cash projections will show how well you have planned, how you can optimize the elements of your business that generate cash and allow you to plan for new investments and contingencies.

6. Licensing

Sell licenses to technology that is non-essential to your company or grant limited licensing to essential technology that can be shared. Through outlicensing you can generate revenue from up-front fees, access fees, royalties or milestone payments.

7. Launch Customers

Find out if you have any customers willing to fund research and development in exchange for the product produced.

8. Vendor Financing

Similar to the trade credit related to bootstrap financing, vendors can play a big role in financing your new business. Establish vendor relationships through your trade association and strike deals to offer their product and pay for it at a date in the near future. Selling the product in time is up to you. In hopes of keeping you as a customer, vendors may also be willing to work out an arrangement if you need to finance equipment or supplies. Just make sure to look for stability when you research a vendor's credentials and reputation before you sign any kind of agreement. And keep in mind that many major suppliers (GE Small Business Solutions, IBM Global Financing) own financial companies that can help you.

9. Sweat Equity

You may be able to find people willing to work for stock options in exchange for a lower salary or a delay in compensation until a later date.

10. Self Funding

Search between the couch cushions and in old jacket pockets for whatever extra money you might have lying around and invest it into your business. Obviously loose change will not be enough for extra business funding, but take a look at your savings, investment portfolio, retirement funds and employee buyout options from your previous employer. You won't have to deal with any creditors or interest and the return on your investment could be much higher.

However, make sure that you consider the risks involved with using your own resources. How competitive is the market that you are about to enter into? How long will it take to pay yourself back? Will you be able to pay yourself back? Can you afford to lose everything that you are investing if your business were to fail? It's important that your projected returns are more than enough to cover the risk that you will be taking.

11. SBA Loans

An independent agency of the Executive Branch of the U.S. government, the Small Business Administration offers several different loan programs. The SBA partners with private and other institutions as a guarantor of loans to help Americans start, build and grow businesses.

12. SBIR and STTR Programs

Coordinated by the SBA, SBIR (Small Business Innovation Research) and STTR (Small business Technology Transfer) programs offer competitive federal funding awards to stimulate technological innovation and provide opportunities for small businesses. You can learn more about these programs at SBIRworld.com.

13. State Funding

If you're not having any luck finding funding from the federal government take a look at what your state has to offer. There is a list of links to state development agencies that offer an array of grants and financial assistance for small businesses on About.com.

14. Home Equity Loans

If you own a home why not borrow against it? Home equity loans are typically used to finance major home repairs, medical bills or college education but you can also use them to boost your business.
15. Community Banks

These smaller banks may have fewer products than their financial institution counterparts but they offer a great opportunity to build banking relationships and are generally more flexible with payment plans and interest rates.

16. Microloans

These types of loans can range from hundreds of dollars to low six-figure amounts. Although some lenders regard microloans to be a waste of time because the amount is so low, these can be a real boon for a startup business or one that just needs to add some extra cash flow.

17. Finance Debt

It may be more expensive in the long run than purchasing, but financing your equipment, facilities and receivables can free up cash in the short term or reduce the amount of money that you need to raise.

18. Silent Partner

You can enter into an agreement with a silent partner that will provide financing without participation in the management of the business in return for a share of the profits. Web sites like Prosper.com are available to link borrowers with lenders.

19. Friends

Ask your friends if they have any extra money that they would like to invest. Assure them that you will pay them back with interest or offer them stock options or a share of the profits in return.

20. Family

Maybe you have a rich uncle or a wealthy cousin that would be willing to lend you some money get your business running or send it to the next level. Again, make it worth their while by offering interest, stocks or a share of the profits.

21. Form A Strategic Alliance

Aligning your business with a corporation can produce funding from upfront or access fees to your service, milestone payments and royalties. In addition, corporate partners may be able to provide research funding, loans and equity investments.

22. Sell Some Assets

Find an interested party to buy some of your assets (computers, equipment, real estate, etc…) and then lease them back to you. This provides an instant source of cash and you will still be able to use whatever assets you need.

23. Business Lines of Credit

If your business has positive cash flow and has proven that it will cover its debts then you may be eligible for a business line of credit. This type of financing is a common service offered by most business banks and serves as business capital, up to an agreed upon amount, that you can access at any time.

24. Personal Credit Cards

Using personal credit cards to finance a business can be risky but, if you take the right approach, they can also give your business a lift. You should only consider using this type of financing for acquiring assets and working capital. Never consider this to be a long-term option. Once your company breaks even or moves into the black, ditch the credit cards and move toward traditional bank financing or lease agreements.

25. Business Credit Cards

Business credit cards carry similar risks as personal credit cards but tend to be a safer alternative. While the activity on this card goes toward your credit report, a business credit card can help you to build business credit, keep your business expenses separate from your personal expenses and can make tax season easier to manage.

How to get started as a Venture Capital (VC) analyst

by Charlie O'Donnell

A lot of people ask me about my VC experience and want to know the secret to getting into the VC world.  Its a pertinent question, especially if you're in NYC.  If you've been paying attention, my VC successor will probably reach the  halfway point in his stint this year, and if you wait until that spot actually opens up to position yourself, well, you'll probably be too late.

As an analyst, you can be useful at pretty much only three things: communication, sourcing, and analysis.  The great thing for VC wannabes is that these are all things that you can do now, before a job even comes up.  There's nothing stopping you from putting forth your analysis of a new startup, or tipping VCs off to potential deals today, even when you're not at a firm. 

Many students have the misconception that, as an analyst, you're going to be put in front of a big stack of business plans and your filtering skill is what's going to make you the next Mike Moritz.  Guess again.  VCs hustle hard to track down deals and they expect everyone in the shop to be bringing deals to the table, because you should be in the flow of interesting things going on.

But, all this can be a lot of handwaving unless you have specific, applicable action items, and since the web loves top ten lists:

1) Make a digital home for yourself.

If I haven't beat this to death already, creating a digital presence, preferably through a blog, gives people you connect with a landing page.  It is the center of operations for all your online networking and a place for people to assess what you're all about, what you're thinking, etc--the equivalent of  hoisting a sail on a windy day.  No presence, no sail.

2) Know your community calendar... attend.

As a VC, you want to meet innovators, but the innovators are already meeting... in Meetups and Co-working groups, speaking events, and usergroups.  They'll be a lot more accepting to you if the first time you meet them isn't when you're trying to vulture around for something to shove money into.  Plus, you need to get out there and in the flow to keep up with what's going on. 

3) Be passionate for the product...no matter what it is.

Frankly, I don't know how anyone could be a VC analyst and not be passionate about the products they're looking to invest in.  If you're doing web services, and you're not a user, you're just never going to get it.  Why do people use Twitter?  Why is Facebook better than MySpace?  These are things you're just not going to understand if you're not a real user. 

4) Be an innovation leader in your own world.

You don't have to be a former entrepreneur, but being generally entrepreneurial and an innovator helps.  Did you lead the investment or entrepreneurship club at your college?  No?  Why not?   There wasn't one?   BUZZ  Wrong answer.  You should have started it.

5) Be selfless with your time for startups.

One of the most valuable thing you can do with your time as analyst is just talk to a lot of startups...get a sense of what you like and what you don't, best practices, good teams vs. weak teams, etc.   And startups are often looking for feedback, beta testers, ideas...   the more you make yourself available, the more you will learn and generally be seen as a useful person to talk to.  Go help a startup with their marketing plan.

6) Ignore the hype.

It's not just about e-mailing the companies you find on TechCrunch.   Just because it doesn't have AJAX doesn't mean it won't be worth billions one day.  Remember that the whole world doesn't necessarily blog and some startups can't even be found online yet because they're still in stealth.  You need to cut through the buzz and make your own decisions.

7) Teach.

You will never have a clearer understanding of how something works until you attempt to teach it to someone else, which requires you to make some semblance of sense of your subject.  Offer to teach at your high school or the Learning Annex or anything...  Convince grandma to join Facebook.  It will be a sobering experience and will remind you that not everyone gets RSS and some people don't see the value of being social and out there.  It's those people that startup success is built on.  Win the middle.

8) Be social and have a personality.

If you're going to be an involved community member, people need to actually like hanging out with you.  This is where those countless hours in college bars should have taught you something.  I know plenty of people who succeed because of their great personalities more so than any other reason.  It's not hard to be nice and have a little fun... try it.

9) Build relationships with VCs..not just for stock information interviews.

Right now, you can go do a report on a hot new space or a review of a product and send it to a VC (or tag it for them).   If you really want in to this space, why wouldn't you?   How about hanging around their blog or showing up at the same events?   VC's don't live in a bubble.  Their job dictates that they need to be "out there" and that's where you should be, too.   It always blew my mind when I was at USV how many people sent biz plans to info@unionsquareventuers (dot) com, when we were so out there with our digital presence. 

10) Know your place.

You are not a partner.  You're an analyst.. or you want to be.  There are a lot of people with a lot more experience than you who have seem this all before.  Respect experience.  Don't trash a startup, because, for all you know, the entrepreneur is the VC's best friend from Stanford or they're currently in talks for funding now.  The best thing you can do sometimes is listen.  Listen to what VCs and entrepreneurs are saying on blogs and at conferences and take it all in before you go position yourself as the greatest thing since sliced bread....especially since a large part of your job will be listening and asking smart questions.

So, the next time I hear from someone via LinkedIn or e-mail who wants to hear about my VC experience, I fully expect that they already go to Tech Meetups, have joined nextNY if they are in NYC, use all this stuff passionately, etc....   That's a good first step.

The "Great Meeting" with Money

by Rick Segal

Suzie, my favorite (and should be yours) start up friendly, Toronto based lawyer, has a post up about meetings with VCs and why we do it.  Some of the items on the list annoy me while at the same time I know she is generally dead on.

She tries to make a good case about asking the hard questions:

"You should never take a meeting with a VC until you've determined whether there is a likely fit between the two of you. Where is the VC in its fund cycle - is it at the beginning of a new fund? Is it about to start raising its next fund? Is this VC raising a fund now, and having difficulty? The answers impact your ability to build an investment syndicate (who wants to co-invest with a lame duck fund?), and suggest how you need to adjust your pitch to fit the circumstances."

My first reaction to this was, yeah right.  I can just see the conversation:

Hopeful: "Thank you for taking this call, I wanted to set up a meeting as funding is at a critical stage. Can I ask a few questions?"

VC: "I know what you wanna know. Look kid, generally we are at the last part of the fund's life, we've screwed off most of this cycle, missed the good deals, acted like a bunch of lemmings chasing "social Webcasting for monkeys" and now my limited partners have our domain name in their collective spam filters with caller ID preventing us from begging directly into the speaker phone. So is 10a good for you?"

I've generally found that, over the short period of time I've been doing this gig (7 years), the amount of, what's the word I'm looking for, right; LYING, that goes on is amazing even for a guy that used to work in Military Intelligence where lying wasn't just a job, it was an adventure.

My point? You'll almost never get a direct, totally transparent answer to this stuff.  Most funds will not tell you where they are in the funding cycle, Google them and check the press releases on closings in order to back into a close guess.  How they doing? All VC firms are in the top quartile, silly, everybody knows that, just ask a VC.

In doing the 30 minute no harm, no foul meetings, I've seen all kinds of interesting businesses. Everything from fireplace cleaners to, well, Webcasting for monkeys.  To prep for those meetings, I ask for a one page summary of the idea or what the company does.  Then, before they show up, I try to be clear in our intentions.  If there is no chance, I say that, giving the person an opportunity to bag the meeting.  If they want to come in anyway, I try very hard to give feedback that makes the time spent a decent investment for the guest in my office.

In my view, there are three types of VC meetings:

The no harm/no foul thing.  I have a more formal process but many VCs do this. Fred Wilson takes random meetings, Brad Feld does as well as Jeff Clavier.  Each of these guys (and others) takes the time to help out a start up with some friendly advice, suggestions, feedback, whatever.  Fred has impromptu meetings when he tells people where he is via Twitter, Paul Kerdrosky let's people know where he is at for the stop by, say hi stuff, etc, etc.   If you 'get' one of these meetings, get in front of these smart people, your only objective is to practice your elevator pitch. 90 seconds of Paul, this whole beanie baby thing is in the crapper and we've solved the problem of getting prices back up.   Do they get it? Tense up? Look for the exit or security?  That's the best you can hope for, everything else is gravy.  "Love to hear more" with a business card is a polite way to get this into email and you moving on.  If they/we really do want to hear more, you'll get specific instructions on who to call, what to do, etc, in order to get to the next 'real' meeting.  But, again, assume you are practicing the elevator pitch and watch the reaction for learning.

The favor.  There is a fine line between somebody doing a favor for somebody else and a genuine, "you need to see this" type of introduction.  Both are 'favors' in the sense that we/I am doing a favor for the person who introduced you to me.  The latter is more compelling, for sure.  If this is a formal pitch for cash, spend the prep time with the person who introduced you.  I'm shocked at how many people convince "Joe" to do an introduction to our firm and then "Bill" doesn't spend any time with Joe on how to best interact with whomever you are meeting.  If you know, for example, Scott Pelton over at Growthworks is an uber-geek, married to a double secret uber-geek, opening up the conversation with some boring marketing slop is not a plan.  With Scotty, "cool", demos, something for him/his wife to play with, source code, blinking lights, etc, all get him going. (Don't let the suit fool you, it's rented from Goodwill.).   Prep for the meeting.

The formal one.  This is where we asked you to come in.  Maybe a ton of Suzi's items are in fact the case. We're trolling for talent, market data, filling the day, etc, but I'd like to believe that more often then not, we (JLA) are interested in learning more about you and your company.  Prepare, practice, rinse -n- repeat.  And here's a tip if you really want to do extra credit homework:  Speak to people who have pitched and gotten a formal no.  Ask them about the experience as that data is even more telling then the funded CEO who is (duh) singing the high praises of the VC firm. 

And you don't have to buy lunch.

Great fund-raising advice

by Venture Hacks

Dharmesh Shah recently wrote a very nice review of Venture Hacks. The article includes great meta-advice about fund raising:

"1. VC Negotiation Is An Art Form: As an entrepreneur, there are few things more "nuanced" that you'll deal with than raising institutional capital. Even if you decide not to raise venture capital, a lot of these skills and deal-terms will likely show up in other dealings you have (strategic partners, M&A transactions, etc.)."

"2. The Devil's In The Details: Most entrepreneurs focus too much energy on the “"obvious" things like valuation. Fact is, there are other, non-valuation terms in the VC deal (vesting, stock option pool, liquidity preferences, etc.) that have a significant impact on the economics of your deal. It's easy to lure yourself into thinking you should solve for the highest valuation. But, in most cases, that's sub-optimal."

I would go even further: non-valuation terms are more important than valuation. Valuation is temporary, control is forever. If you don't control your future, your current valuation is irrelevant.

Your current valuation is irrelevant if you are terminated and you lose all your unvested stock. Your current valuation is irrelevant if the board forces the company to raise a low-valuation Series B from existing investors by rejecting offers until the company is almost out of cash.

"3. Great Advice Is Hard To Find: As it turns out, good advice in the VC business is hard to find. I would define good advice as a combination of competency (i.e. well informed) and objective (i.e. non-conflicted). You can get close sometimes (via lawyers, advisors, etc.) but it's really hard to find great advice."

The amount of advice on entrepreneurship on the Web is exploding. Some of it rocks. Some of it sucks. Advice is only as good as its source. Our source is me and Naval—we're trying not to suck.

"4. It's Not Enough To Be Smart: It's important to remember that regardless of how smart you are, VC negotiation is not just a matter of raw intelligence. Sure, it helps to have a few brain cells to understand the dynamics of a deal, but a lot is hidden away in the dark corners that you only ever learn by doing it. It's also important to remember that the VCs do this for a living. Hopefully, you don't (you're building businesses for a living). You may be twice as smart as they are, but you're still at a disadvantage. Try to even the playing field as much as you can."

Dharmesh's site, On Startups, is a great resource for entrepreneurs.

Why VCs take meetings

by Suzanne Dingwall Williams

I'm preparing for Rick Segal's workshop at MESH later this week, which is an overview of "How to Pitch to a VC." For me, you can't get the pitch right until you understand why you are pitching to a VC.

You should never take a meeting with a VC until you've determined whether there is a likely fit between the two of you. Where is the VC in its fund cycle - is it at the beginning of a new fund? Is it about to start raising its next fund? Is this VC raising a fund now, and having difficulty? The answers impact your ability to build an investment syndicate (who wants to co-invest with a lame duck fund?), and suggest how you need to adjust your pitch to fit the circumstances.

If the VC is a generalist (most in Canada are), you may want to adjust your pitch so it focuses more on how the current opportunity is an extension of other industries in which they have had success - for example, pitching enterprise 2.0 as an inevitable extension of current enterprise applications, rather than as a business model discontinuity.

If your VC is focused on your sector, you need to understand where it has already invested in the value chain, and whether your business overlaps with those plays. This VC is not looking for a missionary investment, but for a company that creates real barriers to entry. No "first mover advantage" slide here (in fact, keep that phrase out of all your pitches, please).

The people who do their homework and approach VCs as potential partners are the ones who have consistently better success. Still, many of you take shortcuts, and assume that if a VC agrees to meet with you, it means something. They must know you're a good fit for them, or they wouldn't take the time. Right?

Not so much. Here is a partial list of the other reasons I took meetings when I was a VC:

1. As a reason for getting to know the company's current investors.

2. As a favor for the advisor the startup had hired.

3. To listen to a new view on the addressable market for a business in which we had already invested.

4. To maintain the market perception that my fund was actively seeking new investments.

5. Because the CFO was rumored to look like Bruno Gerussi.

6. It was right after lunch.

7. There were still 45 minutes until lunch.

8. Lunch was being provided.

Many of these meetings resulted in longer term relationships, even if our interest was not in making an investment. Good business development? Yes. But a useful part of your search for near term money? Probably not.