Raising Capital Guide
Accessing capital from third parties can be mysterious to many technology companies. Our goal is to remove the mystery with a step-by-step guide to raising money for your business from bootstrapping to $10 million-plus. Authored by TechCXO’s Co-Founder and Managing Partner Kent Elmer, you will be led from different stages — less than $500k, up to $2 million and $10 million and beyond — on how to get the attention of investors and secure their investment.
Part 1: $0 to $500k
There are a number of reasons why bootstrapping your first round of investment is recommended by TechCXO. Most importantly, you will be demonstrating disciplines and processes that will greatly aid you as you pursue the big money.
Before you go on a hunt for dollars, here are some fundamentals to get right immediately.
- Nice, Simple Structure – Be sure that from a legal entity structure you are set up as simply as possible. You want to attract investors based on your ideas and operational abilities; they can get spooked if you have an unusual legal structure or equity split. For example, maybe you’ve got a handful of friends and family and raised $100,000 (or used a crowdfunding platform). That’s not a problem. However, if you have 25 investors at $2,000 a piece, the red flags start to go up. Also, if you have employees, have you implemented a bona fide stock option plan or are there just handshake agreements?An LLC structure is typically best. But remember: institutional investors won’t put money into an LLC — you must be a C Corp. However, its an easy, $1k procedure to change an LLC into a company. Simplify your structure and ownership as much as possible.
- Narrow Market Focus – Most startups try to do too many things and wind up failing. It is especially important to maintain focus with limited capital. Pick your best opportunity and go deep into it. Once you’re a leader in that area, then you can expand. If you’re trying to build seven different tech applications at once, you’re headed for failure. Also, exploit a good market, don’t build a good one. Better to have a good technology area in a receptive market than a great piece of technology looking to find a market.
- Think “Medicine” before “Candy” – Part of your narrow focus should be to solve a fundamental problem not addressed well in your market. Perhaps there’s an underserved or overlooked customer segment. Maybe there are painful inefficiencies no one can seem to solve. Much better to have a product that solves a problem than something that is really cool and sexy.
- Constantly seek “IP” – If you don’t have a lot of customers or revenue, you can still be a draw with Intellectual Property. Think in terms of IP protection for whatever you are building. Remember, too: it is much harder to defend a proprietary process than a proprietary product. Your IP may be intriguing enough to attract investors, even without a substantive customer base if you’re addressing a specific pain in an established industry. For example, a biotech startup may spend years in development, but if there is a big addressable market with their device or drug and defensible Intellectual Property, investors will be interested.
We like raising money, and there are many ancillary benefits beyond the obvious access to new cash. Whether its a strategic lender, private equity firm or venture capital, you will be getting both a confirmation of your growth plans and new ways to take your company to the next level. With all that said, however, we typically recommend that up to the $500,000 level, owners try to raise money on their own.
Here are some recommendations for bootstrappers:
- Investors want to see owner skin in the fame — Angels, VCs, banks and private equity firms will want to see owners have equity in their own company. Equity can be straight cash, money from friends and family or even “sweat equity” in the form of quitting a full-time job to pursue their dream. In short, they want to see commitment. Remember: friends and family are fine, but keep it simple. A handful of friends and family contributing money is straightforward; however a bunch of small contributions might spook institutional players. For example, 25 people contributing $5,000 a piece spells trouble.
To continue reading,