Funding Startups and You! Part II
Friday, May 30th, 2008
As promised, I bring you the second portion of the Funding Startups and You discussion and although it won’t be as informative, it should contain some useful gems of knowledge. As if understanding when to rally for funding wasn’t difficult enough, I think that there are many common mistakes made by entrepreneurs when pitching a VC or potential investor and I thought I’d list just a few for examples. (Be warned, I am not an expert on funding but rather have been able to draw upon some experience to come up with useful tips)
1. This is probably the most important and most useful tip for any entrepreneur looking to raise money — do not argue with the investors and proclaim that they simply “do not understand” your idea. There are a variety of stories that go along with this particular tip but the most notable involves a certain vcwear t-shirt about contextual advertising. Generally if an investor does not like your idea, accept the criticism and use it to hone your pitch for the next set. Sometimes an investor will pass the first time but later wish to be involved in follow-on financing rounds. Do not burn bridges.
2. Understand your market. This seems like a obvious tip but in listening to pitches I was amazed at how many entrepreneurs either did not know their market size and growth rate or gave market size estimates that were vastly overstating their product’s reach. For instance, if you’re building an application for pharmaceutical sales reps, your market is not pharmaceutical sales and using the multi-billion dollar figure will not mean anything.
3. Know your competition and why you’re better — or not. Generally with technology plays it is always good to know why you are better than Google, Microsoft, etc. Given their immense resources, the question “Why couldn’t Google just assign 10 people and do this in two weeks?” will come up and you should have some sort of answer, even if there is not way to defend against such a move. Understanding competitive forces in the market will save you a lot of time in the future and may help you tweak your idea to make it more realistic.
4. Do you have a China and India plan? Not really a tip but maybe something to consider.
5. Choose your investors wisely. It seems like common sense that if you’re developing a web application you would not pitch a biotech investment firm but sometimes this happens. Generally it is good practice to specifically target investment firms that you think could offer a lot to your company (outside of the check they write). Mass emailing 100 firms in your area will likely result in zero responses and may be detrimental to your idea.
Hope that helps and feel free to add your own tips in the comments.
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Yesterday I sat down with Stan James of lijit.com and talked about his experience taking an idea in a college dorm room to a funded company with 15 employees.
