When you’re desperate for $ to start a company, you couldn’t care less about its non-monetary value.
Potential Angel/seed investor: “Blah, blah—valuation—blah, blah—preferred equity.”
You: “I see; how much did you say you wanted to invest?”
And when you’re driving down Sand Hill Road for the umpteenth time, it’s hard to imagine there’s a difference between one indistinguishable beige outcropping and the next.
You: “Blah, blah—disruptive solution—blah, blah—first to market.”
VC: “I see; we’ll get back to you.”
For the very short term, it is true: $ is $. But for any distance beyond the limited runway a single investment affords you, there is huge variability between good $ and bad $.
Terms & Logistics
Terms are basically your investment structure—i.e. what you give to get. The two most prevalent seed investment structures are 1) convertible debt and 2) preferred equity. Brad Feld delineates the two is his blog: What’s the Best Structure for a Pre-VC investment? Personally, I prefer convertible debt because of the logistical ease. Whatever structure you choose, it’s important to keep a clean cap table (more in this in a future blog).
On logistics, attempt to keep the number of seed investors as small as possible. Each additional seed investor requires additional paperwork and ongoing communication. First, create a standard seed investment contract early on and if possible, never modify it. Second, institute frequent proactive investor communications so you don’t have to deal with the reactive one-offs. Finally, set high investment thresholds and try to maintain them, although the below Influence/Credibility and Motivation/Support reasons do justify certain small investments.
Influence & Credibility
Influential angel investors offer useful advice and beneficial introductions. This is very good thing, unless you get one of those investors who have to add their two cents at every turn. Credibility comes into play for institutional investors who look under the hood to see what investment movers/shakers have invested to date.
Motivation & Support
Some people invest for the excitement factor, and their fervor can be contagious. I find friends and family (F&F) investors often infuse motivational support more often than institutional angel investors. In addition, there is added incentive that comes from taking $ from F&F PLUs, as opposed to institutional PLYs—don’t underestimate the entrepreneurial levers of responsibility and guilt. On this note, F&F $ is often far easier to close that angel $. One curious lesson I learned late in the seed fundraising game: don’t limit yourself to your rich Silicon Valley F&Fs; they get hit up all the time. Your non-tech, geographically remote F&Fs may see your offer as a rare opportunity.
The VC Fit
If you need to raise venture capital, all of the above goes tenfold for finding the right VC. Man oh man, does a credible, influential, motivating, supportive VC make a difference. There’s so much to say here, I don’t even know where to begin. Le me instead point you to Mark Peter Davis’s extensive Entrepreneur’s Guide to Fundraising Capital, and The Funded.com where entrepreneurs speak frankly about their experience with various VCs.
- Bootstrap as long as you can. If you don’t need external capital, don’t take it.
- Secure 1 or 2 influential credible angels, and leverage their advice/social capital.
- Reach out to F&F $. Their energy will revitalize (and beholden) you.
- Find the right VC. Who knows, maybe your VC won’t even be on Sand Hill Road
2. Good $ vs. Bad $
3. Risk Reduction
4. The Network Effect
5. Been There, Done That (serial entrepreneurialism)
6. The New New Thing
7. Emergence & Maslow
8. The Analogy of the Watch (moving parts)
9. A Clean Cap Table
10. Perseverance or Blinders
2. Readers & Editors
3. Genre Opportunities
4. Target Marketing
6. Creating you Brand
7. The First Review
8. The Network Effect
9. Amazon Ranking
10. The Book Tour