Establishing a solid financial base is one of the toughest challenges a startup faces.
There are few hard and fast rules about whether to accept equity or go into debt, what characteristics to look for in a financial partner, and how to structure deals.
Three experts offered their ideas during a panel discussion at the Sept. 6 gathering for Digital First Friday, a monthly networking event sponsored by iSocrates, a St. Petersburg-based digital media company. See the video of the full discussion below.
Joe Hamilton — co-founder of the St. Petersburg Group, publisher of the St. Pete Catalyst and a partner in Seedfunders.
Reuben Pressman — founder and CEO, Presence, and Entrepreneur-in-Residence for the city of St. Petersburg
Sue Goodman — principal and founder, SRG Consulting, and a seasoned finance and investment professional
Here are some highlights from the panel, moderated by Mark Lombardi-Nelson, co-founder of Shoot to Thrill Media.
Lombardi-Nelson: Walk me through the options — debt, seed money, private investment. What are the pros and cons?
Goodman: If you are a small business and you are bootstrapping, debt is probably not an option … Don’t use your credit cards; that is one of the worst things since interest rates will kill you. The easiest is friends and family but you can burn bridges. If you do that, that’s a big caveat, if you fail, you can alienate them … You sometimes have to come across — I hate the word — but the right sugar daddy, someone who gets you, who understands what you are doing.
Hamilton: Don’t get to the point where you are running out of money before you take money. That puts you in a weakened position, so look ahead. That’s what a good business operator should do … The old adage is, if you ask for money you get advice and if you ask for advice, you get money. That’s actually a nice thing because the people that are helping you, understanding you, and getting to know you and want to help you are the people you want to get the money from. So look for advice well before you need the money.
Pressman: I look at raising fund as inflection points with the idea that your first raise is to prove that you can do it. You’ve got that first customer, that second customer, maybe the third. And then maybe your second raise or next inflection point is to prove that you can do it again; you can replicate what you’ve done successfully, maybe a few times. Then the next raise or inflection point is how fast can you replicate it, continue doing that and scaling it. At all those points, there’s different reasons you are raising money, different points you are going for, but when it comes time to talk to [investors], you have to get them as on board as you are, why you believe this will be the next big thing or very successful. They have to buy into that.
Lombardi-Nelson: If you are seeking equity investors, how do you protect your ownership in the company?
Hamilton: One way to protect yourself is to be very accurate with your raise and size, looking at those inflection points. In an ideal world, you are raising the minimum amount you need to be comfortable and get by, to earn your way up that next tranche to get at the new value you’ve earned. If you go for it all at once, you’re going to get all that money at your basic value.
Goodman: Be realistic in your valuation. Don’t think your company is worth $2 million and you’re pre-revenue unless you do have the next best thing out there. Be realistic, but also know your partner. Just because someone is offering you the amount of money you need and they are asking for less equity, doesn’t mean they are the right fit for you. You want a partner that knows you, who gets you and will support you – so know what their background is and what they bring to the table. You’re not just getting a partner that brings cash. You are trying to get a partner that will bring connections, that will help you get to the next stage. Don’t just have your eye on the dollar sign.
Pressman: The best way to protect yourself is to not raise money at all. Most companies never need to raise any money in the first place and probably shouldn’t. I strongly advise against it, even though I have. Make sure you have some success and progress before you go to raise cash and you’ve got the right stuff set up for the terms. But you should never be raising money because you need it. You should be raising money because it’s going to make you faster, or do something better. It’s all about growth.
Lombardi-Nelson: Is it possible raise seed funding or venture capital without an exit strategy? What if you want to stay in your business and you’re raising, what does that look like?
Goodman: You don’t need an exit strategy immediately when you are getting money. You want to grow. You just want to have a solid business plan for the next few years and execute … Big private equity wants to be out in five to seven years but I wouldn’t worry about it. You want a strategic partner, someone who will work with you, not just the cash.
Hamilton: You definitely don’t need an exit strategy to raise money … The big thing about an exit strategy is that it informs the direction of the business, the path that’s best for the business, and that will inform the type of investor you bring in.
Pressman: Most of the type of capital I’ve raised and the investors I have, I almost always get the question of what’s your exit strategy. Even from Day 1, I had an idea in mind. You don’t have to know “this company, for this much money, this way and this year,” at least have an idea of why this is going to be valuable. Especially with venture capital. The only way they make their money is when they get out of it.
Lombardi-Nelson: What matters most to investors?
Pressman: It’s traction, whatever that means. It’s measured by you. The earlier the stage, the more they are betting on the jockey, not the horse. They’re investing in whether they think you will continue to be successful at this, over anyone else out there. That must come across and you must be confident, and have facts and reasons why that’s going to be the case. From there, there’s nothing better to matter traction than revenue.
Hamilton: For me, it’s customer acquisition strategy, the traction you are getting and the ability to get more of that. That’s the big rarity factor in business today. Ten, 20 years ago, if you had a big addressable market and a kick-ass idea you were 90 percent of the way there. Now if you have a big addressable market and a kick-ass idea, you are 10 percent of the way there. Attention is insanely fragmented now and the people who have the ability to get customers at a reasonable cost are the rarest to me.
Goodman: Communication. Never have surprises. The last thing your investor wants is a surprise. If you have a problem, a hiccup, you lose a customer, something blows up — communicate right away. I worked at a bank and companies would come in and if they didn’t meet their projections, we would think they were too stupid to know what was going on or their lied to us. Do I want a liar or do I want an idiot? … This has to be an open communication with your investor. If you wait until you are supposed to deliver financial statements to them and you show a doughnut, they aren’t going to be too happy.
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