Raising capital…

December 17, 2006

So we’ve been at it for almost 6 months now and have been able to accomplish a ton of stuff on a very limited budget. So far, Seth and I have contributed our own money to the business and have created the corporation, built a fancy corporate website and an interactive product demo. The remainder of the budget is going towards technology maintenance costs, travel costs and the like. However, we both agree that we need to raise outside capital to build our first consumer rewards program website and have enough money for more inevitable legal costs and some initial marketing initiatives that will help us get the word out about our consumer rewards program.

Seth had been slaving away on a business plan and executive summary, and I have built a detailed financial forecast to go with it. These are the basics any investor will want to see, although most won’t believe the financials. Anyway, we are beginning to reach out to people within our personal network of friends and family to see if there is any interest. We sent out the investor materials in the mail to avoid having soft-copies of our confidential materials floating around in cyberspace. Realizing that Christmas is rapidly approaching, we do not expect people to devote much time to reading our plan. However, we want to get the materials out there so we can follow-up after the break.

At this point, we have also reached out to a few venture capitalists through our personal networks. We even went up to Boston to meet with one of them in July. They seemed to think that our idea was pretty unique but very “hard to execute.” The takeaway was that we were just too early stage for them, since we just had a good idea and a detailed business plan. Given we were also young and did not have a “track-record,” it was highly unlikely that they were going to roll the dice on us at this point. The funny thing is that they left it open-ended and said that they would be interested in seeing how we progressed. That was probably the best we could have expected to hear. We realized that we probably went to chat with this VC prematurely. We ran the risk of hurting our chances to raise money from them given we lacked any credibility whatsoever and were just pitching them a grand vision.

So the business plans are going out this week and we’ll follow-up to see if there’s any interest in our company after the holidays. I’ll keep you all posted.

Bottom Line: For you entrepreneurs out there, my couple pieces of advice on beginning a fundraising process is to make sure you have a well-written business plan and some semblance of financials and not to reach out to VCs too early (if at all). Investors want to see that you’ve done your research and have put together a thoughtful presentation. They want to know how big the financial opportunity is and will want to look at financial statements (usually an income statement will suffice – use the internet to learn more about this if you don’t know what an income statement is). The second piece of advice is not to go to VCs prematurely (so don’t worry if you don’t know any). They will generally not fund a company with just a good idea and will look to get as much information from you as possible (even more dangerous if you actually have a good idea). The common feedback will be that they are interested in monitoring your progress and to keep them in the loop. This process is time consuming as is, so I would recommend that you (the entrepreneur) spend time focusing on your business and raising money from more likely sources, which I will discuss in a follow-up post.



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