We might have bootstrapped in the beginning, but as time passes and the product scales, we realise that raising investments is the only possible solution to support the product. Every man’s dream would be the ability to understand the expectations of his better half and every entrepreneur’s dream would be to understand what the investors are expecting from you. In this session of how to start a startup, we have big names like Mark Andreessen, Ron Conway and Parker Conrad giving insights on every entrepreneur’s FAQ – How To Raise Money?
But for that, we need to know first how does an investor think.
What makes an investor invest in a company?
Compared to the conventional thought of first time entrepreneurs where they feel that once they have a great idea and product added with a billion dollar projection of the company should be good enough to raise investments, the ground reality completely differs (at least for your seed round). In Ron’s own words, the first aspect they look in an entrepreneur is “Is this person a leader?” because entrepreneurship is about leadership, and building a team that would contribute to your billion dollar vision fundamentally requires a good leader and a good communicator. To shed some lights on the venture model, Marc states that there are two concepts that are followed. Looking for an outlier company and invest in strength versus lack of weakness. One quick take away for the entrepreneurs would be learn to explain your product in one compelling sentence, that would let the investors imagine your product. Through out the journey, entrepreneurs need to be decisive, as the only way to make progress is to make decisions.
Bootstrap as long as you possibly can.
In one of the books by Steve Martin it is exclusively mentioned that “The key to success is to be so good, that they can’t ignore you” and this works well even in the startup scenario too while trying to expand your business. When you bootstrap you will have complete ownership of your company, and raise money only when you feel it’s extremely needful with a good track record and relevant data.
The single big thing that entrepreneurs are missing both on raising funds and how they run their company is the relationship between risk and cash.
For every entrepreneur raising venture capital is going to be one of the most easiest way raising venture capital is the easiest thing a startup founder is ever going to do. As compared to recruiting engineers, selling to large enterprise, getting viral growth going on a consumer business, getting advertising revenue, and almost everything you’ll ever do is harder than raising venture capital.
Now that you know how to raise (assuming that you know), whom should you approach for investments? Investors is the obvious answer, but who are the right kind of investors you need to approach for your startup? Check out the video for what happened when Ron invested in Google !
One highlighting feature during the course of the discussion was the Onion Theory of Risks shared by Marc and just in case you missed it, you can read it here.
So you raise seed money in order to peel away the first two or three risks, the founding team risk, the product risk, maybe the initial watch risk. You raise the A round to peel away the next level of product risk, maybe you peel away some of the recruiting risk because you get your full engineering team built. Maybe you peel away some of your customer risk because you get your first five customers. So basically the way to think about it is, you are peeling away risk as you go, you are peeling away your risk by achieving milestones. And as you achieve milestones, you are both making progress in your business and you are justifying raising more capital.