Financing Strategies

Just knowing that you need capital for your business isn't enough. Knowing who you are will make life easier.

For example, say you're a Web 2.0 company and need $10 million to launch your business. Seed of $1 million and a proposed Series A of $9 million. That's a nice strategy, seems intelligent, designed to mitigate risk and increase valuation along the way. But wait, a Web 2.0 company is supposed to be able to seed, launch and begin aggregating users on say $200,000. Why, because most Web 2.0 companies are not particularly well conceived, well founded, or well, gonna make it. Seems the venture community all walks the same talk...show me it works, aggregate… then the money.

Well that's intelligent too, from a VC's perspective. Series A is the old Mezzanine round and Seed is the old Series A. Wait, then what comes before seed? FFCC (friends, family and credit cards). For a Web 2.0 that’s about $25,000 to 50,000, probably enough to develop a web site that has limited opportunity to succeed. If the entrepreneur is smart and very, very lucky, s/he will use free new media like Blogs, message boards, YouTube, a pitch on Vator, myspace, etc., then maybe they will attract users long enough to get a "traction" card. This traction card will be the ticket to a seed round of perhaps $500,000. You will live or die on this.

However, what if you think you’re not a Web 2.0 company and are really something else? In this case, you may have to find alternatives to the early-stage VC because they will not seed, or Series A without validation, period. And, if you need more than $50,000 to launch, then angels or project financing is the only practical solution.

Not every technology business can be started on a shoestring. Not every new Internet company will be founded by programmers that can build an Alpha site and launch a business for $25,000. What if there were bigger ideas, the ones that may actually stand on their own and not be part of the gaggle of potential Google acquisitions?

Investors need to manage risk. They have a fiduciary responsibility to their investors. Moreover, they all remember Web 1.0…so caution is a part of their DNA now. But, I think they are missing out by being too safe. Seems to me that an investment strategy that sprinkles a few hundred thousand on a bunch of ideas that may actually work enough to either be sold to a portfolio company and exit at a 2X or a larger media company at a 5X+ is too safe and boring. If I were a VC, I’d manage my portfolio differently. Perhaps a few sprinkles here and there, but I would not follow the herd. I would look for the big idea, the one that needs more capital and doesn’t have “traction” and won’t until $10 million or more has been spent. Big ideas are what made the valley. If all they do is look for little bitty web 2.0 companies to sprinkle a couple of hundred grand on and then sell, then where is the next BIG ASS company going to come from? Not from Silicon Valley, that’s for sure.

So here’s the tip: If you are a Web 2.0 fine, have fun, but you will need $25 to $50 thousand and a boat load of registered users and some idea of how to monetize that before you are ready to present to early-stage VC’s.

If you are not a Web 2.0 start up, think big. Look for strategic partners/investors and either project finance or raise a very large amount of money from investors that understand your business. If you look for seed at a VC, you will be wasting your time. Know who you are before you start.