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Thread: Equity: How to raise from $1000 to $1M

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    Equity: How to raise from $1000 to $1M

    It may not be for everyone, but here's a great article on how to go about raising funds. It's a long article so you may need some time.

    The reality is a little trickier. Fund-raising is a process, and although the right pitch might come in handy, in this chapter Iíll discuss the practical start-to-finish way to think about fund-raising that will get you the money you want in the end.
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    Some good points there - but...
    it ommits the key issue - who funds what...
    The reality is that angel investors (individuals) tend to invest no more than £50k - £100k - though they may come in for a second round, nd / or invest more in something where they have an interest...
    VCs tend to want to invest more than £2m or the DD is too high a % of the investment
    so in-between there are a few firms in the equity-gap funding market - mainly government backed - but not many - there the money is hard to find...
    so in his title of $1,000 to $1,000,000 the reality is Angels at the lower end - and nothing further up

    for the record - I was MD and owner of an R&D company which got equity gap VC funding of c. $0.5m 9 years ago - it was hard then, and it is harder now...

    Alasdair

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    akirk is historically right but more recently there are two changes, at least in the U.S., that seem to be helping to fill the gap. One is the formation of angel networks that act more like VC firms and take larger positions than any single angel investor is likely to take. The second is that some VC funds, often through creating a special fund, have moved down into that bracket, primarily to make sure that they have a seat at the table if and when the company seeks funding at the next level. It's sort of like a professional sports team investing in a minor league team to help keep the talent pipeline filled.

    Also, even when the typical investment gap exists between the single angel investor and the VC firm, the solution is typically to find more angel investors. That usually means more networking and going farther afield to find investors, which typically means that the company needs to put together a formal private placement memorandum as opposed to sitting down and simply going through the business plan. That both drives up the cost and lengthens the time frame for raising the capital, but it is often the only way to have a realistic chance to fill the gap.

    The bottom line is still the same, though. Even with the multiple ways to fill the gap, raising capital in the $500K to $2M range is the hardest to do.

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    Paul Graham's article is often referred to for funding advice.
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    The author of that article is curious. He is not apparently either a professional or serial fund seeker.

    I have to say, I do not recognise much of what he says despite having raised money for at least ten companies often as an outsider, across a range of tech, sales , service. I prepared the plans that raised was £10million mixed public private for a tech venture on merseyside - which sold out last year to an american conglomerate. In addition I have raised venture funding in the £50K zone perhaps 5 times, Grants and bank funding many more times, sometimes for me sometimes as a hired gunm

    With the emphasis on "demo" the author of that article is clearly limiting himself to trying to raise money for a tech deliverable product embodied in software, which is a very specific and limited area.


    A couple of observations:

    (1) Alasdair is correct, and the funding gap is real and exists for a simple reason.

    A £50K is a punt done on good feeling and belief in the founders and the market - but because it is a punt - there are limits to how much anyone will gamble. Theinvestors I have met are reluctant to involve "Multiple angels" as hinted in the above post, because it spells for dilution and lack of clear decision making paths. It limits the upside too much.

    To do proper due diligence costs money ( an army of numties charging ridiculous figures for borrowing your watch to tell you the time) costs £ten(s) thousands, and to fund that without making massive damage to the overall budget means a minimum investment of £250K and realistically £500k - most of the funds want to invest at least double that.

    And between the two is precious little for that reason of due diligence.
    There are very limited options. I once got a NESTA award to bridge that kind of gap, but it is not easy at all.

    (2) Getting through the door is the first problem.

    And the conventional wisdom on business plans is wrong - the kind of plan that works to get through the door of a VC reads like a long sales letter.

    The worst thing that you can do is produce a "standard business plan" - much like a "standard website" it is long on information and hopeless at selling. Venture capitalists and particularly celebrity entrepreneurs get tens of proposals a day or a week. So a document entitled "busines plan for mywebsite ventures" starting with the "executive summary" gets filed under B for Bin.

    It needs a big promise as the headline. And a deck copy that feeds the greed glands. Then a story that leads into the irriestible offer, proof of value, proof of credibility ,lots of mouthwatering bullets answering with why this , why now, why me why you, answering the objections then a call to action with a mystery ellement that makes them want to call to find out. Speaking after their interest. Answering the conversation going on in the recipients head . With a VC it is how much can I make, how quickly, how can I get out, and prove to me YOU can do it...it is about investing in aperson not just a business. With a bank it is "show me your plan A, B. C and D that proves the money unconditioanlly safe, and that you as well as the business can survive the worst scenarios.

    In short the best business plan IS A LONG SALES LETTER!! , a differnet one for each class of recipient. The plan is no different, it is what is drawn out as important in what order that changes...- it has all the elements of long sales letter..

    It can only get you an audience not the cash.

    (3) The best kind of presentation

    Anyone who has not yet read "pitch anything" by Klaff - should do so. Presentation is a power struggle, not just a game of ideas. And that book is the best description of how to win the power game which Klaff describes as colliding "frames"

    Klaff is a master at this in the specific arena of raising money. I wish I had read this years ago!!!
    Suggest everyone involved in selling reads it!!


    (4) Make sure you ask for enough. Venture capitalists screw you into the ground if ever you want £1 more later - in fact many have that in mind as a strategy from day one. Anyone who labours under the illusion that investors are "angels" should revise that opinion before they get burned. There are 100 legal ways to screw an inventor out of his invention, and I have heard these animals actually laughing at how they stiched up their latest conquest. I know some, and I would not shake their hands , because i doubt I would have a full set of fingers afterwards. Most of them would not sell their grandmothers for only one reason - they sold her years before. You have been warned!! Just watch the movie about facebook - "the social netowrk" - and see how they screwed Zuks first partner with Zuk's complicity it should be said.. That is a very real and normal day in the office for such people. You have been warned!

    (5) Just because you are offered money , does not mean you should take it. Check the costs and terms and conditions.
    Big funds want to put "good old boys" they owe a favour onto the board for outrageous costs. These people do not live in the real world of balancing the books of a small business. The very costs of the funding and the army of professionals they tell you you need, (eg professional FD who then wants to employ accountants for a business that just needs a part time bookkeeper in reality) can easily sink the company. or certainly stunt its growth.


    (6) Crowdfunding. A hard one.

    In my view it is simply in breach of company law in the UK, I actually wrote to the secretary of state who is the only one who can act for the breach of the law, asking whether he intended to clamp down on it because of it was inevitably going to shaft small investors (minoriy shareholdings are worth nothing without elaborate shareholders agreements). No response. I challenge a couple of crowdsourcing companies. No sensible response from them either. One implied "it was OK because we have been approved by an FSA regulated company" as if that means anything!!
    Last edited by mikeb; 10 April 2012 at 6:41 pm.

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    Paul Graham is a well known entrepreneur, programmer and venture capitalist. He's one of the people behind http://ycombinator.com/

    I agree with you that there are some sharks out there, but entrepreneurs who've used ycomb, for example, seem to be very happy with what they got out of it (going by the comments in their blog). They've got a library of good articles here from the likes of Kawasaki, O'Reilly and others.
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    Quote Originally Posted by Clinton View Post
    Paul Graham is a well known entrepreneur, programmer and venture capitalist. He's one of the people behind http://ycombinator.com/

    I agree with you that there are some sharks out there, but entrepreneurs who've used ycomb, for example, seem to be very happy with what they got out of it (going by the comments in their blog). They've got a library of good articles here from the likes of Kawasaki, O'Reilly and others.

    Fascinating. The mixergy interview http://mixergy.com/y-combinator-paul-graham/ well worth listening too.
    .
    I am only used to how investment was in the UK up until about five years ago since which time I have had no use for it, and not been involved for others either, other than chucking the odd £few K into other peoples ideas that I like. There is a question to how much time they can be giving the startups when there are so many, and $18000 goes nowhere, so it sounds to me they are investing at the stage of more or less blank sheet of paper: also I suspect, when a new investor comes in , he gets out at a profit, so that he is not gambling on more than the "investability" of a proportion of the companies, rather than the long term viability of them, which if it happens is icing on the cake.

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    Similar to ycomb is the 500 Startups. Their blog didn't seem that informative, but click their accelerator tab and they claim to offer a "mixture of up to $100K in funding, superhuman mentors & designers in residence, platform-specific strategies for customer acquisition, a creative workspace..."
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