When It Comes to Financing a Startup, Let's Not Forget There's More Than One Way to Skin a Cat

Posted by Anonymous Angel

I must admit to having a chip on my shoulder about investment conferences. The ones where you pay to watch venture capitalists and angels market themselves on panel after panel, espousing about “the way” things are done, as if there is only one "way."

And then to add salt to the pot, they talk about their myriad of web-centric deal flow that "so-and-so did with such-and-such in a seed round," and everyone on Angel List and the like is piling into (see this column). This type of deal flow is seen by said angel or VC as a badge because it shows how focused they are.

My favourite statement in this scenario is when they tell you they only look at one in 100 deals. So my question is this: if they only do one in 100 deals and only with their internet buddies, why do we give them so much airtime? Why are there regularly over 500 entrepreneurs at any given investment conference that won’t be using these angels and VCs or their methodology?

The truth is, I think entrepreneurs go to these conferences because they have read too much marketing shit. Furthermore, when an entrepreneur hasn’t had any previous experience in deal structure or doesn’t know how to best structure a deal for their particular industry or exit size, they assume there is only one way to do things.

This generally occurs because they don’t spend the time to find out about the 99 alternative financing mechanisms that are out there. Instead, they get advice, or read what came through to them in a Google alert, and assume that their only way to get financing is as follows: go to accelerator; get lead super angel to invest; go to angel list for more investment money; get VC money; move to Silicon Valley.

Don’t drink the Kool-Aid. It’s okay to finance your company in other ways than through the stereotypical angel and VC route, and it’s even okay not to use an angel or VC at all.

We could write a book on the plethora of ways to raise money. They all do start in the same place. You the founder need to be the source of the initial risk capital. You need to put “skin in the game."

After the founders, debt is better than any equity, unless you know—actually know, not just hope!—you need to scale quickly. If you pay your interest, the bank leaves you alone. It’s dumb money, so fix that by utilizing boards or advisory boards.

(PS: There’s a lot of debate around right now about whether an advisory board is useful. I would contest it is, however VC’s tend to hate advisory boards. They think money trumps the ability to intelligently build companies.)

Second, money is hard to come by. So if you need growth equity and you are one of the 99 doing med devices, food and beverage, electronics, clean tech, ICT hardware, etc., assume you will need 24 to 36 months in research and development.

You are too slow for a VC and angels, because they can’t make any money off you. Work part time, use grant money, use friends and family money (say 20 friends at $5,000 each) to get to the place where professional investors can become involved. Borrow from the friends, give them preferred shares and protect them at all costs. They are the only ones that gave you the time of day when the chips were down. At the end you may have to pay them out of your own exit proceeds—that’s called integrity.

Third, customers trump banks and private investors. This goes back to the saying, “you are a company, not a startup." When you are focused on revenues and not fundraising you don’t have to listen to anybody. And good customers and revenues means that when you do need rocket fuel, you will probably be looking at competing term sheets. And if your product is that good, you can probably collect 20% deposits.

If you need angels, maybe you should look at a lot instead of a few. It seems the trend is towards small angel placements ($10,000 to $75,000) with the expectation that you will need to tap them more than once as you hit milestones. Nice part about this strategy is that angels and VC’s have been known to run out of money, so having an arsenal instead of a single nuclear weapon seems like good risk mitigation.

However, once you do this, you have given up the VC route. They hate large parties, especially if they have to clean up your cap table.

So here is my advice to an event planner looking to make money. Plan an investor conference where the first stream is looking at the myriad of financing structures and models and the other stream is “standard investing models used in Industry X."

The afternoon is filled with panelists looking at alternative financing case studies and a list of who does that type of funding in North America, you know, the 99 stuff. And if you need to, you can add another panel from another angel or VC saying the same things that were said at the panel last year.

Because no matter how many times you hear it, they still aren’t doing your deal.

Originally published in January 2013.

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Anonymous Angel

Anonymous Angel

As a significant player in the Canadian startup and venture space Anonymous Angel has 15+ years of experience helping entrepreneurs build companies. In possession of a well-worn rolodex of contacts in both Canada and the Valley, Anonymous Angel can often be found giving back to the Canadian entrepreneurial community through mentorship, education and as an advisor. Like most angel investors,... more




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