Capital is the “oxygen” for many start-ups. With capital, you live another day. Without it, you fail. It is just that simple.
Founders often get caught up in the excitement of their ideas, unique market insights, the support of friends, but when the rubber hits the road – capital enables execution and sustainability.
Get the Foundation Principles Right
Fund-raising for the humble entrepreneur is very personal. And “getting it right” early is critical to achieving personal objectives. The decisions made early can often not be undone. And this is just when founders are most vulnerable – when they most need to “have it together.”
Early planning is where a solid foundation helps. I have written on the importance of well-defined purpose, and mental models that guide founders. These no-cost tools will give founders a distinct advantage in capital formation.
Early Thoughts and Focus
In this series of the blog on capital formation, I will focus on the needs and potential strategies of early stage founders. Primarily, I will center my advice on the seed and early stage rounds.
Conversely, I will avoid mechanistic principles. There is plenty of solid advice written for later stage funding paths that layer multiple rounds – B, C, D and later.[1] And in any event your advisors, lawyers, investment bankers and early stage investors will all have a point of view and needed advice.
Every founder has a different view of raising money. And there is never a one size fits all strategy. Having said that, here is a view into suggested organizing principles that have worked in my experience:
1. Raising and deploying capital requires stewardship. It is a privilege to be able to raise money to discover whether your dream works. Humility and gratitude are important. In my view you always should honor not just the legal commitments but also the moral commitments that you make to early stage investors. Things will change along the way. And they are as vulnerable – and in some ways more than you are.
2. Capital sources and amounts should always be in alignment with personal goals of founders. (Don’t just take money to take it). Smart money beats uninformed money.
3. Founders can build confidence for all stakeholders by constructing and evolving a solid “scenario analysis” that supports their capital formation strategy.
4. Capital formation is a strategy – not a series of events. The strategy serves the purpose of the Company and the founders. A capital formation strategy that is out of sync with founder and investor expectations is a formula for failure and disappointment.
5. Building profitable revenue is the best capital formation strategy that there is.
Much Capital. Few Good Companies.
The good news for founders is that we live in an interesting time – where capital is relatively plentiful – and good ideas and companies relatively few. It is also fair to say that the capital markets are experiencing a disruption of their own. “Angels” are becoming the early stage investors of choice. And venture capital firms are having to transition traditional models as crowd-sourcing platforms dis-intermediate early stage funds.
All of the personal and macro dynamics make for interesting funding decisions. Perhaps some of the advice that follows can in some small way be helpful to you – a humble entrepreneur.
[1] See, Venture Deals, Be Smarter Than Your Lawyers and Venture Capitalists, Brad Feld and Jason Mendelson; High Tech Start Up, Revised and Updated, by John Nesheim, and publications like Tech Crunch and research tools like those provided by Business Intelligence (BI) and CB Insights.
