My company, Ringio http://ringio.com , is at stage 2 "Working Product Stage" and it would have been impossible to raise any money in the last 6 months as we went from "napkin stage" to where we are today.
Anybody want to comment on their own fundraising experiences?
The difference between a live prototype and a quirky working product is very fuzzy. Intelligent people can easily disagree. What's a good self-test?
How is quitting a very high paying, very stable, job for a much lower salary at a company that might not make it not taking a big risk?
A VC telling someone to use their savings? Why would someone pay for salaries and servers and then go to a VC later? The whole point of VCs is for them to take on the major financial risk in exchange for a large chunk of the company.
I can only speak for the first two categories... but if you look at this paragraph from the article:
> You have some people who are using the product, but who are probably not paying for it. It is a new idea. Perhaps a revolutionary idea. No one else is doing it. And it works.
That last bit of "it works" is really important. It doesn't mean that it works technically, what it means is that it works for people as a solution to the problem, that there is a good product/market fit if you want to use lean startup terminology.
I think the sooner people realize that everybody wants easy money, the better off they will be. For me personally, if I was at stage two (working product stage), I would never dream of giving up equity unless it was the last resort.
A VC has a portfolio to balance that risk over. I don't. Asking me to take opportunity risk is fair, but asking me to pony up my savings is a bit much I think.
Not that I wouldn't do it necessarily do it, but I sure as hell wouldn't respect a VC that told me to do it instead of giving me money.
It's like asking a bodyguard to take a bullet for you, just to prove that they'd really take a bullet for you.
It would be less off-putting if they said "You put in the first $150k and build it for six months and if we invest then we guarantee that you can take your $150k off the table (if you want too)."
As the original blog post author, I figured I would toss in a few comments to add to the discussion - thanks for reading it and the great comments:
1. Most companies are not meant to be VC-backed. If you (and the VC) can't see your company getting to, say, $25M in profitable revenue with under $10M of equity capital (or more revenue for more equity capital) then VC is probably not right for you. I know, not all VCs focus on revenue and profits. Call us old fashioned but we still think they matter.
2. When we look at your business, we not only look at it as an investment opportunity, but, we also compare it to other companies we are actively reviewing. At NAV we are active investors. We have funded 5 companies in 2010 and have term sheets on 2 more. But at any given point in time we may have 5-10 companies we are actively evaluating. So it is not just a question of how good is your business, but, how good is your business relative to the other businesses we are currently reviewing. So on the founder investing their own cash question, no, it is not a requirement. But given two businesses with similar upside, if one founder has put real money into his/her business personally, and the other one has not (but could) then the former scores more points in our mind.
3. VCs don't seek to take on "major financial risk." We actually spend our time trying to understand the risks facing each business, asking how we might help mitigate those risks, and then we compare the risks to the upside. In other words, VCs are risk-tolerant, but not risk-seeking.
The obvious bias in this article is the assumption that you will want to raise money from a VC at some point. Not everyone should.
The biggest reason not to raise money is that most of their investments go sour, so they need the others to hit it out of the park. However swinging for the fences carries additional risk. Furthermore focusing on big enough opportunities to give the investors the return they are looking for may prevent you from going after perfectly good opportunities. Becoming a $20 million company may not have been your initial goal, but isn't a bad outcome either. And a viable company of that size may find opportunities to grow organically later.
One simple piece of advice. If you have TWO offers of financing, the terms you end up with will be MUCH better than if you take the first offer, or only have one offer.
In addition to that, VCs are herd animals. The knowledge that another VC is interested makes it easier for the other VCs to believe that you're hot. (Similar to the article yesterday about hot supermodels.)
And very similar to high school/ college (undergrads?).
I wonder if that's the reason charismatic founders end up succeeding.....Jobs, Zuck.....come to mind.
My company, Ringio http://ringio.com , is at stage 2 "Working Product Stage" and it would have been impossible to raise any money in the last 6 months as we went from "napkin stage" to where we are today.
Anybody want to comment on their own fundraising experiences?