How to Successfully Raise Capital for Your Startup
This is the first in an occasional series of blogs for fledgling entrepreneurs
Raising capital can be a challenging (and dispiriting) proposition for a young entrepreneur. Most founders start out with friends and family money, but that takes you only so far. For many, the VC community is the next step. Having raised about 30 rounds of capital through six companies in my career, I know first-hand how difficult the process can be. You take your business plan, you march up and down Sand Hill Road in Silicon Valley, and you pitch and pitch and pitch until you find some firm willing to take a chance on you.
My advice is to think like a salesman and treat every rejection as just part of the job. Most of your pitches are not going to result in a term sheet. You are going to be shot down over and over again. Stay optimistic. All you need is one person to believe in you and your business plan. Be persistent. When I was pitching Carbonite, my last company, I made over 40 presentations before getting a term sheet. Today Carbonite is worth $1.4 billion.
If VCs turn you down, probe for specifics. If you hear the same objections over and over again, think about adjusting your pitch to preempt the objection. VCs focus on reasons not to invest in a deal, so try to knock down the objections in your presentation.
VCs will usually wait a few days before giving you a “no.” Meanwhile, thank your audience, and ask them if they know other investors who might be interested, and seek an introduction. After a while, you’ll develop a network of contacts, gain a better understanding of the VC landscape and get a feel for the firms that are good fit for you and your business.
Venture capital firms come in all shapes and forms. Some concentrate on early-stage investments. Others focus on mid-stage or late-stage opportunities. And each outfit tends to specialize in specific industry or market segments. It may take some time to find the right firm for your particular situation. Through all the rejections, remember this: if your business idea were obvious to everyone, you would already be too late. Also, remember that VCs are no smarter than you.
Venture Capital Firms Aren’t the Only Game in Town
If the VC route is not right for you, there are plenty of other options to pursue including angel investors, family offices and strategic investors. Many startups go the angel investor route and there are dozens of well-organized angel groups around the country. Every major city has angel investment clubs where you can pitch your ideas to successful local business people. In Boston, we have Boston Harbor Angels and Beacon Angels, to name a few. With the angel approach, you get a relatively large number of investors (usually dozens) to each make a relatively small commitment (usually tens or hundreds of thousands of dollars). You also get a lot of free advice, because most angels are themselves successful entrepreneurs and have been around the block a few times. Early in my career, I learned more from my angel investors than I did from my VCs.
You can also pursue individual investors through an entity called a “family office.” Many ultra-wealthy individuals use private financial advisors to invest and manage their money. Some family offices serve the needs of a single ultra-affluent family, while others represent many families. It is a close-knit community, so once you get your foot in the door it is easy to branch out.
Strategic investors are another potential source of funding. If you think your product could be potentially useful to some larger company, see if that company has a venture arm (many big tech companies do) and tell them why you think your product could specifically benefit them in the future. A strategic investment is often viewed as a prelude to a future acquisition and a way to bring fresh ideas into a more bureaucratic organization.
Think Beyond Your Current Business
Raising capital can be a daunting proposition. Don’t be afraid to ask for help. Find a mentor who has gone through the process. When I was younger, I liked pitching angel groups because I could always find someone willing to mentor me a little.
Don’t forget that if you have that entrepreneurial blood, you’re probably going to start a string of businesses in your lifetime. Put your investors first and make sure that they feel like you are putting their interests first. If you treat them right, even if your company doesn’t succeed, they will respect your efforts and are likely to be there again for the next try. Make money for an investor and he or she will want to invest in you again. Better still, so will their friends. Once you have made money for your investors, they’ll line up to back you the next time. Wasabi is my fifth company with co-founder Jeff Flowers. We just raised $68 million without making one VC pitch.