Funding – The key to funding your idea
David Mandell – Funding – This question is the key to how you’re going to fund your idea.
So funding is always a really hot question in the startup world and I think it’s one of the most misunderstood questions as well.
Because what tends to happen is people read a blog post or they will follow someone that said this is how you do it or go read a follow VC on twitter that said this is how it works and the reality is different for everybody and people tend to think “Oh this is how you do it’ you have to do this, you raise this and this amount, you have to do this and profitability…” and that’s just not the case and it’s really an individual thing that’s both about the founders and the business and whether or not you bootstrap or raise money has everything to do with what’s your financial situation.
Can you afford to bootstrap, can you not afford to bootstrap, do you need the relationships that a VC brings to the company to help you grow the business? Do you need other insight from other people that are involved in your industry or your environment? So there are all very personal questions and I think the best way to answer the funding question is to understand what you need as a person and as a business for the next eighteen to twenty years. How do I get my business to the next stage, what is it going to take me and my team to get my business to the next stage which is proving another big hurdle? Right, so A. do I even have a product, do I have any interest from customers how do I get a baiter out there to get people to try it, do I need an investor to get a technology build, once I have a customer or two and I’ve got the technology that’s working how do I show there’s real demands that I can drive revenue? Once I’ve showed that’s there is real demand and I’m driving revenue how do I show that the market is big enough and I can really make this a big business? And what do I need personally along the way; do I have a family I have to support, am I out of college living in a closet somewhere? I don’t care.
Right? Those are all very personal decisions but I think the right answer from a funding perspective is all about what do you need and what does your business need to get to the next phase and how little do I need to get to the next phase which is a another really big key thing to consider.
There’s a lot of over hype about valuation and investment and who can raise a bigger round, who can get the higher valuation? And people get caught up in that hype very easily and in reality what you’re doing is setting yourself up for another big barrier. Every time you raise a round of money and your company gets valued, you’re raising the amount of money it’s going to take to exit from that business. So if you also get this huge valuation and you think that’s awesome for someone to value you at 20 million bucks and you’ve got a bunch of money into the company, understand that you’ve now set up a hurdle that you have to meet.
So before that money runs out, you need to prove that your company is worth a lot more than 20 million bucks or you have to convince someone to pay you 200 million to buy your business for ten extra terms of investment. So reality is really about what do I need, what does my business need to get to the next phase and how little do I need not how much. And I’m not saying to starve yourself right, but be realistic and understand what’s the right investment for the business right now, what’s the appropriate evaluation base on market rates, what can I achieve with my business over the next phase that makes that valuation worth it and I think those are things that a lot of first time entrepreneurs forget because they get caught up in the hype and those are the things that can kill a business.