A few thoughts on the captial-raising process…

March 30, 2007

Based on our experience over the past few months trying to raise money, we’ve learned a ton of things. I figured it would be helpful to share some of these thoughts with any budding entrepreneurs reading this blog for inspiration and advice…

Based on our short experience, if you’re a start-up looking for money, you’re best bet is to go to friends and family for seed capital. Any little bit helps. These are the people who have known you since you were born and want to see you succeed. They will want to help in any way they can (money or advice), hopefully. It is definitely awkward asking friends or family for money, especially if they do not have much of it.

Be careful who you take money from. Don’t take money from anybody who cannot afford to lose it. That may have come out poorly. But the point here is that you don’t want to take grandma’s last $5k or $10k and lose it if your venture fails. She’ll never forgive you and you’ll never forgive yourself. While it’s easy to take money from just about anybody willing to give it to you, try to be selective and take money from people you know who will not bust your chops on a daily or weekly basis. There are plenty of people out there who expect weekly updates and glossy annual reports for their $10,000.

It’s up to you whether you want to spend the time with investor relations (i.e. dealing with investors) or running/growing your business. This is not to say you should take the money and run. Entrepreneurs call this “Green Money” which basically refers to people writing you a check and not providing any additional value/advice/time/etc. “Smart Money” refers to investors who invest money and are committed to providing advice and help in any way they can. Obviously business angels with wide networks and lots of business experience may be better suited for this than your friends and family. However, you’d be surprised what kind of great advice can come from your family; just ask them.

Start-ups, like us, are forced to raise money from unlikely places. Most people think that start-ups simply to go a bank or to VCs for money. But this is just not true, simply because banks won’t make risky investments in businesses with no revenues and neither will VCs. VCs also want management with proven track records and will typically want to see customers and sales before they get interested. This means that you need to find money through three common channels, two of which are a terrible idea.

1) Loading up on credit card debt

2) Taking our home equity loans or a second mortgage (doesn’t work for you renters out there)

3) Going to friends and family for a loan / sell equity in your business

Out of the three listed above, numbers one and two are to be avoided at all costs. While this seems intuitive (of course, who wants to be in debt), many entrepreneurs don’t have a choice. They need cash and don’t have any family or friends with money. Taking on debt to start a business is like screwing yourself two-times if the business fails. If the venture fails (stats show failure rates at over 95%), then not only did you lose your own money and time you invested in the venture, but you’re now up to your eyeballs in debt and may never dig yourself out. Not a pretty picture…

The third option is the best, if it’s available. It is the most awkward of the three because it’s the only option that involves you asking for money. But trust me, get over it, and it will be the best decision you’ve ever made. Friends and family are the only people who will invest in your business (in you) at this point. If you take a little bit from a lot of people, you can spread the risk around and not have a terrible sense of guilt if you lose every last penny Aunt Jinny had in her IRA account. The key here is to communicate with your family about your business. Be excited and keep them in the loop. That way, it will not come out of left field if/when you ask them to invest. We started this whole business (OnCard Marketing) hoping that we would not have to ask friends/family for money. However, we realized quickly that was not possible. It was a very hard decision to make because we never wanted to be in a position where we had to look across the table at Grandma and Grandpa over the holidays and try to explain why their retirement savings went up in smoke with our venture.

Bottom Line: Try to raise money from friends and family before going the riskier route of taking on debt (credit cards, mortgages etc.). Don’t accept money from people who can’t afford to lose it. It would be ideal to have two investors put in $25k (fewer investors putting in more money). However, most people don’t have rich relatives. If this is the case, spread the risk around to many investors and have them invest an amount they are comfortable with. Anything more will create a world of headaches in case things go south with your venture. I will follow-up with another post on the legal side of fundraising and a run-down of the legal documentation you should have when you raise money.

JT

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