Startup building blocks: funding

TOBY RUCKERT
Last updated 05:00 19/07/2013

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OPINION: In my last article I looked into options for partnerships between startups and governments. This is important because if startups can get government investment, it makes fundraising from other investors easier.

Part of the due diligence has been done and it helps keep dilution of ownership lower when taking investors on board.

 The first two companies I started didn't require external investment. However, Unified Inbox was a different story.

I believed I had a great idea and I’d built a team and strategy around it. I even had a prototype. But fundraising was a completely different ballgame.

Having a viable business idea is very different from having a fundable business. Ideally, everybody who gets funding should have a viable business. But that's not always the case.

Extremely few companies actually get funding and if you haven’t fundraised before, the chances of doing it wrong are incredibly high. Money comes at a price and often that price is too high or has onerous conditions attached.

You have to know what you’re getting in to. Learn as much as you can about investing and about trends. Know which business models investors favour, and get to know the people you want to approach.

There is a lot of money out there and many investors, but only a few genuinely good ones. So do your homework.

When I realised I'd have to raise money for Unified Inbox, I read the book Be smarter than your lawyer and venture capitalist.

It explains the terms and conditions used in financing rounds really well and I strongly recommend it to anybody looking to raise funds.

In addition, study some of the blogs of well known entrepreneurs and VCs, such as: 

·        www.feld.com and www.askthevc.com

·        www.sramanamitra.com

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·        www.avc.com

·        www.bhorowitz.com

·        www.bothsidesofthetable.com

·        www.500hats.com

In doing so, you'll learn a lot and be able to converse in any investment or funding discussion with ease. Just remember, VCs are in business to serve the limited partners they have raised money from.

 Some key lessons I've learned along the way:

 ·        When you need financing the most, you often won't get it.

·        As a general rule, you’ll need three times more money and time than you estimate.

·        Once you've taken external financing, act fast and pray your plan works out as financing is like heroin: once you're used to it, you always need more.

·        Don't accept what appears to be too good to be true. It usually is.

·        Know your worth and stand up for it. At an early stage, avoid valuation discussions. Use a convertible note or equity as instruments to delay valuation discussions until the proper milestones have been reached.

·        If you're a first time entrepreneur, getting into a good accelerator program before raising money is a good idea.

·        Launch in a limited way: try to control your costs and cashflow when you launch. If you need to scale to a thousand servers to satisfy demand without having cash in the bank, it's not a good place to be while negotiating with investors..

·        Treat your users and customers as if they are your first investors. Learn from them as early as you can.

·        Try to have a backup plan if your funding runs out. Who will continue to work with you and how? Can you bootstrap again?

·        Most investors have a herd mentality. Once somebody is invested, others tend to follow. Investing with a friend is also more fun, so try to entice any new investor into finding a couple of others that could consider investing, too.

·        If in doubt over whether to accept money from an investor, ask yourself whether you'd want to have a beer with that person even after a long and hard day of work.

 The toolkit:

 ·        Create an AngelList profile and manage it well. You could use Gust, too.

·        Build a mailing list or group network of your strongest supporters and update them regularly.

·         Create a Pressdoc account and keep building a list of editors and bloggers you can push out news to occasionally.

·        Have a Dropbox folder ready for investors, including a one or two pager and a 10-to-20 page slidedeck with your business details, CV and strategy. Update it regularly and track who opens it.

·        Be spot-on at social media and own the conversation.

 Ways to raise funds:

 ·        Friends and family.

·        Crowdfunding. You'll need a brillant video and social media strategy, so give this some thought before trying it.

·        Angel investors. There are quite a few smart angels out there, but even more wannabes. Be careful how much time you spend with individual angels.

·        VCs. They generally have a good description of which type of deals they like and where their sweet spot is.

·        Get investment from people who want what you're building. This can be your early beta testers or customers that would pay some kind of deposit in exchange for a life time membership, or it can be a corporate partner who has been looking for a solution like yours.

Toby Ruckert is the founder of Unified Inbox. Read the full article on his blog: www.tobyruckert.com

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