How to Raise Money as a First Time Founder

http://wadefoster.net/post/58039721398/how-to-raise-money-as-a-first-time-founder

by WadeF • 13 years ago

93 25 13 years ago

johnrob• 13 years ago

While we are getting more and more advice about "how to raise money?", the startup community really needs to raise the prominence of another question: "should I raise money?". If properly addressed, I think the latter would be a good filter for companies that aren't impressive or committed enough.

The worst outcome isn't failing to raise money; it's raising money and wishing you hadn't (wrong team, wrong idea/market, etc).

TheHydroImpulse• 13 years ago

Yes, 100% agree. This is one of the biggest issues right now. Too many people are raising too much money without focusing on revenue or profitability.

jusben13692• 13 years ago

You should write a post on it! I'm sure it'll be controversial (in a positive way)

argumentum3• 13 years ago

it's raising money and wishing you hadn't (wrong team, wrong idea/market, etc).

Great point, though from personal experience I think 1st time founders will never get this until things go wrong after you raise. Raising money is attractive, not just for the money, but for the validation it brings. One of the hardest parts of doing a startup is talking with non-founders about what you do .. it's so easy to say "I work at Google" or "I'm in med school". The closest equivalent, for founders, is being able to say "our investors .. ".

I remember PG mentioned this .. that one reason Y-Combinator was so successful is it gives high-acheivers "a program" to talk about, almost a vetted excuse for why founders who could be otherwise working at Google or Goldman, or studying at Stanford are instead living in a cramped apartment and subsisting on ramen.

But I think it's ok to get seduced by money and prestige for the 1st time. You learn, you move on and up and get better at this stuff. Mainly you learn that the most important skill of being a founder is separating yourself from how non-founders think. Then you no longer focus on external validation and start thinking about building a real company.

dragonwriter3• 13 years ago

One of the hardest parts of doing a startup is talking with non-founders about what you do .. it's so easy to say "I work at Google" or "I'm in med school".

Is it really hard to say "I founded and run a business which does <X>"? I mean, its more words than "I work for <foo>", but its not really that much more complex of an idea, or unfamiliar to most speakers and listeners.

mindcrime• 13 years ago

If properly addressed, I think the latter would be a good filter for companies that aren't impressive or committed enough.

It's more than that, though. You can be terribly impressive and committed and still decide that raising money isn't right for you, at a given moment in time. Raising money is just a tool, not the end... that, to me, is the point more people should focus on.

I think it's also important to realize that "failing to raise money" isn't the same thing as "failing at a startup" unless you're at a point where you absolutely cannot proceed without more money.

soneca3• 13 years ago

I have the impression that the importance of traction heavily outweights all others. So much that it is not even worth reading about these small victories like introductions and other tactics if you don't have traction yet.

The only substitute for traction is past traction (on previous startups) or a very big credential (as being on YC or being early employee on a big hit - Facebook, Google, etc). And this narrows the audience to only a few individuals for whom these tactics might apply.

Not by chance Paul Graham recent essays are aimed at this YC batch aproaching Demo Day. And, as interesting as is to us, regular folks, reading this; it sounds like reading advices from a pro driver on how to drive a Ferrari. They may be somehow useful, specific tips that you must know if you want to drive a Ferrari. But you first must own a Ferrari. Before you do it, they are just fiction.

And if you do have traction, I guess all these tips will have just a marginal influence on the outcome. Posts from VCs and succesfull fundraisers always seems like hindsight rationalization about why it worked. Forgetting that traction was the single most important reason by far.

I mean, traction is 99,9% if you are a regular founder, not a star. So wondering about the 0,1% is more of a Maseratti problem.

jusben13692• 13 years ago

I'd say for most Angel's it's 40% Market/35% Team/25% Traction. After all, a great team with traction but in a small market = no meaningful exit. But a great team in a large market can use funding to grow traction. And an Ok team (you're not sure on them) with real traction in a big market is probably worth the gamble (you can always encourage a key new hire if you see a deficiency)

soneca3• 13 years ago

You are right about the market, but I would say that traction changes the opinion for any team (as it is a very subjective evaluation). And team usually perceived as great may generate some doubts if they don't have traction.

EDIT: Thinking a little bit more, I guess the market dictate how much money you raise and for how much equity. But if you are fundable or not, I still think is about traction.

SurfScore• 13 years ago

I think you're right, but I don't think the breakdown is as drastic as 99%. Traction is most important by a wide margin, because it proves that you're doing something right. This is a capitalist society where the market dictates what succeeds, and if the market dictates you're succeeding, then you're a hot commodity.

As far as YC goes, most HAVE traction by Demo Day, significantly so. It's not like these companies have an early beta with 20 users and are raising on a name. Most of the time they achieve early traction from a combination of YCs guidance and the fact that if you get into YC, you're typically a pretty good entrepreneur and have a higher likelihood to succeed.

soneca3• 13 years ago

I think you are right about YC. These teams usually do have traction.

badclient• 13 years ago

Not to mention traction is a very subjective thing, especially for b2b companies.

And even after you get traction, the type of traction begins to matter. For example, you can go sign up 100 paid customers for your product in a week by contacting your Dad's rolodex. You may have see that as traction; most VCs are going to have major questions about how you'll get your next 1,000 customers and why you haven't proven any of those channels yet.

7Figures2Commas• 13 years ago

How to raise money as a first-time founder? Start a company at a time when a first-time founder can write a serious blog post entitled "How to Raise Money as a First Time Founder" that contains the following two sentences back-to-back:

1. "When we went out to raise money, we raised with only a couple thousand dollars in monthly recurring revenue."

2. "But we had a solid product, strong weekly revenue growth (10% week over week), and two distribution/marketing channels that were already paying dividends."

Patrick_Devine• 13 years ago

It's funny. I _just_ got back from seeing a VC earlier today on Sandhill Road, and when I told them we were working on building out a product, they told me I shouldn't focus on that and should come back instead with a business plan. I'm fairly convinced that if I'd gone in with a business plan they would have told me to come back with a product.

Ultimately I think PG is correct. Focus on building out the business. If you spend all of your time planning instead of shipping, you're going to fail.

JustinJ70s• 13 years ago

This sounds like the start of VC goose chase. They'll never say no but instead just keep you busy on the off chance that you'll hit on something. The only thing that snaps them out of it is the serious prospect of actually making a ton of money with managed risk.

al1x• 13 years ago

I wouldn't waste a minute of time writing a business plan. If you want to throw together a 1-pager, or a quick "Business Plan" .ppt presentation, sure. Nothing beats product and traction. For the record, I've contacted thousands of VC's, spoken to hundreds, and closed none of them over the past 4 years. I have only once been asked for a business plan, and of the rest every one of them asked to see a demo.

dakrisht2• 13 years ago

Traction doesn't apply to a hardware startup. Quite simply, it's impossible to get any sort of "traction" when you don't have the cash required to commercialize hardware and release it to customers. Not to mention the manufacturing fiasco.

And not all startups are app-driven. Most are, since hardware is hard and a lot of startups like to ride the app-wave but this post only takes those into account.

Sure, social startups and other "apps" playing the users + page views + engagement numbers game can easily make an app, grow an audience and have their "traction" but this blog post applies only to those types of companies.

MANY factors are taken into consideration when raising money - not just traction. Where you went school matters, who you are, your team, your product, your business model, your ability to start and run a business, your past experiences with running a business, and etc.

It's not just traction.

VC's aren't stupid.

pbiggar• 13 years ago

Traction applies to everything. Look at the hardware startups that used Kickstarter to gain traction before shipping! Lockitron and pebble for example.

But you can get traction in lots of ways. Got 200 customers on your waiting list? 10000 people follow your blog? 20 enterprise customers with verbal commitments to buy? Those are all traction.

dakrisht2• 13 years ago

I agree with you that having customers on a waiting list or a pre-order list is a great move with regards to pre-money traction, but there are certainly companies out there with proprietary technologies that require funding before they can be brought to life. Particularly, in the life sciences, biotechnology, and other high-IP areas, it's not very intelligent (or feasible) to launch a Kickstarter campaign in order to get traction.

But you make a _great_ point - traction doesn't apply to just users, which is something this particular post heavily emphasizes. Having 10,000 blog followers, pre-orders, enterprise customers, commitments, even endorsements from influencers who can promote and/or sell the product once commercialized, are all traction. Totally. Even IP is traction if done right.

Additionally, two years ago we didn't have any crowdfunding and there were plenty of companies that raised money without any "traction" as it's commonly understood in the Techcrunch arena today.

How to Raise Money as a First Time Founder

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