Dave, I’m involved with a software startup that’s ready to raise some money so they can grow more quickly. I don’t know anything about venture capital, so I thought I’d ask you. How do we find a relatively small amount of VC money ($250K)? The company in question makes software for investors. Can you give me advice on how to proceed?
Before we go any further, please realize that any investment of less than a million or two pushes you out of the Venture Capital zone and into angel investors. While most angel investors fly solo, a lot of them are part of angel investor groups like the Silicon Valley-based Band of Angels. They’re the best of the angel investors, in my experience, because they can offer something a lot more valuable than a check: expertise and connections in the industry. Trust me, you want access to their address book much more than you want money in the bank.
For angel networks, you can rummage around in Google and see what you can find, especially since another rule of thumb with any investor is that they don’t invest in companies more than two hours drive from their own offices. (to be fair, this isn’t a hard and fast rule, just a good general expectation). That should get you started on Google.
Pay attention to the local business publications: when other companies get funded, find out who funded them. Investments typically have a “lead” investor and a bunch of “follows” and while that’s easily ascertained with VC, you can also find a lead angel, sometimes. They are, obviously, exactly who you should target. If you don’t have connections, try a site like LinkedIn to see if you have friends or colleagues in common. And go to LOTS of professional networking events.
In terms of what an investor is looking for, remember that the key watchword is “exit strategy”, or, to be less blunt, how they are going to realize the return on their investment.
If you invested $50k in a startup, you don’t want to have stock that you can’t trade worth $300k in five years, you want to get in, invest, and get out. In the “golden” days of the dotcom bubble, your exit strategy was expected to be an IPO, but we’re not in those times any more, alas. So, instead, a typical exit strategy is either an acquisition (known informally as an “M&A” for merger and acquisition) or a larger investment round down the road from a true VC, a round that raises a few million or more. But even then, most VCs don’t invest to pay down debt or buy outstanding stock, so that’s not too common.
So the real question to ask your team is: do you have a business or do they have a neat piece of software? A business has a marketing and sales organization, existing customers, a measurable market visibility, a long-term development plan, and so on. Most startups – even some that are funded, frankly – aren’t full businesses. But if a company does have a strong, competitive product, some measurable cash flow, a few good customers, and some visibility in the marketplace, then it’s well positioned to look for some capital to help it grow faster. Investors don’t pay for that first step, though: startups have to get their act together first.
The only possible investors who would be potentially interested in a super-early stage startup (e.g., the mythic two guys in a garage) are “F&F”, or, as Guy Kawasaki calls it, “F&F&F”, friends, family and fools. (Guy’s book The Art of the Start is a must-read too, as I explain in my own review)
I’ve also written about how to write an investor-friendly business plan and how to present your company to investors at my startup info site. It’s not pretty, but the information is well worth reading. I also write about the world of VCs on both this blog and my business blog The Intuitive Life. In particular, an article I wrote about how to figure out what valuation you should expect and how to calculate the minimum investment that a VC can make should be very informative reading for you: Does this VC really want to invest in my firm?
Brad Feld, a very accessible VC here in Colorado, has a terrific weblog too, where he often talks about the VC world: Feld Thoughts. Highly recommended.
Finally, note that the infamous Sarbanes-Oxley has had a significant impact on the investability (gak, new word!) of a startup too. If your firm isn’t already SOx compliant, you need to get your books in order NOW, before you try to raise any capital. If you need to brush up on Sarbanes-Oxley, I’ve written about that too: What is Sarbanes-Oxley?
Hope this is all helpful, and good luck to your team!