OK so if you’re pitching me and you’re not sure you want to take VC money, what exactly are you doing?! I’ve had a enough similar meetings with founders I think its time for a blog post on the subject.
Here’s how the conversation goes…”I made some money in my last gig/startup/whatever. I self-funded this project.” It’s going well but I’ve burned through my capital. One of my early investors is an investment banker. He says he knows other wealthy guys and we don’t have to go the VC route, give up board seats, deal with their firm’s baggage and listen to their myriad opinions.” OK that’s a bad start to a meeting with someone who is a gateway drug to more traditional venture funding. In many cases, it is also a bad way start to a tech company. Do your research and figure out what kind of money you want and need.
Funding from experienced early stage investors offers very valuable things beyond capital:
- There is an established, milestone-based template for your development that you can follow which enables you as founder to focus on building a (profitable… well, eventually profitable) product your customers love.
- There is a very organized — if sometimes opaque — marketplace for capital. With a little time and effort you can develop a long list of potential high-fit investors who cover your category, don’t have conflicts and have a good track record of success. And these investors are used to looking at deals, are comfortable with the lightweight due diligence possible at the seed stage and know the typical deal terms. Plus they can help you on future rounds of funding. I’ve directly introduced almost $100M in growth capital (other peoples’ money) into my portfolio companies over the years. Start on AngelList.
- Speaking of deal terms, VC type investors know the difference between a priced round, a SAFE agreement or a straight up convertible note. They’re not going to come up with exotic funding agreements that turn off future investors. Good ones will be sure you’re set up for success in the next funding round.
- Good seed stage investors have experience helping companies get to the next important milestone…which is product-market fit and the all important Series A. And let’s be honest, how many companies do you know that leave the seed stage so profitable with such great growth that they don’t need additional funding?!
- And a great seed stage investor can become an excellent board member when you do your Series A. I’ve been a board member in about 25% of my deals over the years. A seed stage investor as board member has a couple of valuable attributes: they’ve grown with the founder and are a known quantity; they have different motivations and drivers than a typical multi-partner VC firm; often times they have operating experience.
I’m a contrarian in many areas but not in funding. I think companies should innovate in product, not financing. I’ve seen some big problems when founders take money from inexperienced investors:
- “My early investor wrote a big check but has some pretty aggressive terms if I’m not successful.”
- “My early investor introduced me to his rich real estate friends and they all want to write checks but I can’t get anyone to agree to deal terms. I don’t think I can get this thing closed and now I’m hosed.”
- “My early investor wrote a big check but wanted a controlling interest in the company which seemed OK at the time.”
- “My early investor was a father/son combo. The father was experienced in business but got busy doing other things and the son has no interest in helping us grow. In fact, he wants the money back for other things that he thinks are cool(er) — like a Lamborghini.” (No joke)
- “My early investor is pushing me for an immediate exit because he wants a return and wants to deploy the capital in other places.”
Who needs this freak show? Find good, experienced, balanced, helpful seed investors who know what they’re doing.