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Wednesday, August 17, 2011

Need Money? A Few Links to Possible Investors

It is clear that if you have a new startup, getting investors is essential.  Some startups take smaller amounts of cash than others. Borrowing against ones property to fund the business is risky and it is advisable to think very carefully if you elect to take this as your means of capital.  You may end up owning most of the business which is great if the company succeeds, but if it does not, why lose your house.  There are a wide range of possible resources to explore.  They are often topics of startup blogs which you can find in the internet.  With some of the recent trends, this issue is being revisited here to provide a updated useful links and discussion for consideration.

Remember that most startups get no professional investment in the early years.  You may need to manage with no salary for prolonged periods of time.  In addition, some investors do not want to see early cash go toward salary.  They want it invested in the technology.  Later in the investment cycle, you can get paid, but plan to survive with no salary from the startup for a year or two.  Self-funding is a great option IF you can afford it, but do not quit your day job.

A recent article in CNN Money titled “Cash is king: 8 tips for optimizing your startup financing strategy” describes issues in developing a strategy toward raising capital.  It reviews key issues like valuation, risk, and milestones. If this is your first startup, it may be worth reviewing before going out to talk to investors. 

Sources to consider for capital:

·        Friends & Family are often used in early times by many startups.

·        Crowdfunding is a relatively new activity that may allow for capital raise of $100,000 or less (usually less).  Crowdfunding requires casting a wide net in order to gain small amounts of cash from many investors or donors.  GrowVC recently wrote an article titled “5 Ways to Initiate The Crowd In Crowdfunding .  The concept is discussed along with some thoughts on ways to attract groups.  An internet search will also provide more ideas as this is a hot topic of late.

·        Small business, SBIR, Government, State Grants and/or loans are sources. The military, NIH, and NSF can also be considered.  There are also not-for-profits specific to certain diseases that fund programs as well.

·        Loans or lines-of-credit.  You can borrow from certain state agencies against your technology in the company.  One interesting approach is getting lines of credit for via possible vendors.  If a vendor wants to lock you up as an exclusive, ask for something in return! One can borrow against personal assets but, this adds risk beyond the time spent with no salary.

·        Startup Incubators.  Sometimes you can get services for equity in incubators.

·        Angel Investors often like to get in very early VCs usually come after the company is better established and better developed. Angels are most often high-net-worth individuals desiring investment in early stage companies.  Their reasons vary widely.  Single investors are common, aggregates and clubs exist as well.  Look around and network.  A recent article titled “The Top 10 Angel Investor Groups” listed   Ohio TechAngel Funds, Tech Coast Angels, Investors' Circle, Golden Seeds LLC, North Coast Angel Fund, Band of Angels, Hyde Park Angel Network, Alliance of Angels, Pasadena Angels, New York Angels Inc. In addition, there are resources listed in the website of the Angel Capital Association, a trade association of investment groups.   An article titled, “Choosing a business angeldescribes some attributes you may want to look for in investors in your startup.  Remember, you are taking a partner and you will be living with the investors for some time.

·        Venture Capital firms are becoming more conservative in investing.  The choices are many, the funds less, and the criteria have been elevated.  Be prepared to have extensive diligence reviews and negotiate tough deals.  That said, a few articles list venture firms are:  Top Venture Capital Firms of 2011 Based on Deal Activity (Q1 2011) , The Top 10 VC Firms, According To InvestorRank , Top 14 Venture Capital Firms.  There is a National Venture Capital Association and the web site contains info that may be useful as well.  Another way to find possible VCs is to look at competition and see which firms invested in their financings.  Sometimes, these firms will talk to you because they know the space. Your legal counsel, accounting firm, advisors, and friends likely have contacts with VCs and will make introductions.  In dealing with VCs, they often give better consideration when introductions come through known sources; i.e.  NETWORK, NETWORK, NETWORK, this will take you a long way. 

·        Equity or future revenue streams could be traded for services.  You are trading paper today for promises in the future when you have money or value.  I always like this one!

·        Licensing or Partnering with a BigCo or Vendor.  You are forming a deal which will hopefully be a Win:Win arrangement.  These can come with upfront cash and future payments from the partner, or for services now and promise of future payments.  

·        Commit to a major customer.  This may be more for technologies which are user oriented but may not fit with medical products for example.

Taffy Williams is the author of:  Think Agile:  How Smart Entrepreneurs Adapt in Order to Succeed to via Amazon