I have met with numerous founders over the last year. The one thing I have encouraged all of them is to closely consider how to finance their companies. The repeated question is should they angel or venture finance and who are the best investors?
I deeply believe that almost every founder should try to bootstrap his/her company until some meaningful customer traction is achieved. A couple ventures ago, I made the mistake in taking money early before a business model or product was established. Bottom line - raising money early gives you less time, less ownership and less flexibility.
When you take money, the price and pressure changes. On the venture side, you need to build to a large meaningful exit to make the economics work for all involved and this is not a bad thing. Your personal economics can be very compelling if you can reach a large outcome in a venture company. On the other side, you can have the flexibility to sell for $15 million and have a similar economic outcome in an angel-financed company.
So how do you know what to do?
1. I submit that for most companies in the founding stages, you don’t know. I think every company should start the same way –founder dollars and sweat equity until some pertinent traction is achieved. At this point, you are in the best position to negotiate with investors (angel or venture).
2. After initial momentum, you have to ask yourself realistically does this company have a big enough market and the need for large capital to the point where a smaller piece of the pie will result in much better economics than going it alone? If you are raising money to meet payroll or ease your personal economic burden, you are doing it for the wrong reasons.
3. To take on venture, you must be comfortable with not selling the company for 10-15 million and be confident enough in your decision.
4. As you raise more money, you lose more control. This is a very uncomfortable thing for a founder. If your dream is big enough, you may have to lose control to gain critical mass. However, having a company with traction from the beginning will mitigate the dramatic loss of control. Also, don’t just take money from the venture person with the best terms. All venture people (as with angels) are not created equal. If your company is desirable, you will have a competitive situation and you should take your time to find the best fit by speaking with other successful founders. Venture firms will do due diligence on you – you must also do it on them. All money is green, but investor behavior can make or break your dream.
I could write a book on this topic, but the key ideas on when to seek venture versus angel are pretty simple:
· Build it yourself first to prove it is real then consider all the factors above when making the decision to continue or change investment paths. Don’t forget with whom you invest often matters more than the best terms.
Neal
