There are several questions you must ask yourself before you decide to go out for private or professional capital.
How much and when?
Do you need investment capital now, or can you continue to bootstrap your company from your own resources, and from friends and family?
Can you reach initial, sustainable revenue (or early profitability) without outside capital? Do you have customers pending that might close soon?
What are the a market conditions and pressures that indicate you must move or grow faster than you are at this time, and therefore need significant capital now?
What if you wait? What do your realistic projections show (burn rate, potential revenue, access to strategic funding that does not dilute your equity position?) about when you might need this additional funding?
Most technology startups follow a pattern about funding. Where does your company fit in this pattern of investment?
• Seed capital: $750K (ranges from $100K – $1.0M) usually from private sources (your savings, friends & family, individual angels)
• Series A: up to $3M (ranges from $1.0 to $3.0M) usually from individual angels, or groups of angels
• Series B: up to $7M (sometimes this round is $3-5M, or more) from boutique or larger venture capital groups.
• Series C: up to $15M (this is your growth round) often syndicated among several boutique and larger venture capital groups.
Capital efficiency and the real “how much”
Look at these numbers and consider all the talk about capital efficiency, a recent buzzword that investors mention as a criterion for funding. Essentially, it means: how far can you move your company along with how little capital? Can you build and launch your company by bootstrapping and controlling your capital tightly?
The expectation of capital efficiency has evolved from the lower cost of creating Internet and software applications due to the availability of so many off-the-shelf tools for product development, and the availability of agile software platforms and low-cost offshore labor.
Notice that, for all this talk, it really does take more than $20M to build a company that can be positioned for a significant exit.
Your next question is: what do you mean to do with this company? Do you have a clear exit strategy? Without this, your strategic steps may wander off the path of the exit you have planned.
• Keep it as a “cash cow” that generates continuing revenue, profits, distributions and annuities to the key players?
• Sell it to a strategic buyer?
• Put it on the public market for an IPO?
The answers to these questions will help you to understand both how much capital you will need between launch and exit, and what kind of capital you should be pursuing.
Investors come in various flavors (and combinations): private, angel, venture or strategic/corporate.
Since professional investors (usually angels and VCs) require a return on investment (ROI), they are usually assuming you will sell or take the company public, and they do not participate in companies that plan to remain in the hands of their founders creating cash or annuities.
Certain private investors may be interested in a long-term annuity return from a cash cow company.
Strategic investors tend to be corporations that can gain from some alliance with your product and company, and may want access or first look for acquiring your company later.
With all this said, the temperament of investing changes year-to-year, and sometimes quarter-to-quarter, depending on many economic and market conditions (often out of your control and the investors’ control). So, in addition to these issues, you must assess the investment climate (boom? bubble? bust?) and the best timing for gaining capital.
For the current conditions (Q1/2011), see my earlier pieces:
• Venture capitalists get optimistic again in 2011: news from chairing the venture panel at Consumer Electronics Show http://bit.ly/f2b9yH
• Where will your startup be in 2020, when you have the chance to create your wealth? Startups in an unknown economy http://bit.ly/i7W37g
Next weekend: part 2: Creating your unique value proposition