The shares you sell at the beginning are the ones you get the least amount of money for, and yet cost you the most in terms of the percentage of equity you have to give away. You can understand why: you have no sales and no track record, but lots of unproven assumptions. You are a risky bet. Once you have gotten some sales and proved your idea can work in the real world, you are in a much better position to raise money. And get a better deal. Oh, and one thing to consider when you are selling shares further down the line: try and split them between voting and non- voting. That way you get some capital, but no matter what, you keep control. Nike did it this way. And Phil Knight was an accountant.
Well, you could use your savings. There’s your credit card. There’s your mum and dad. There are your friends. There are even your suppliers. (Arrange 90 days’ credit with them and then do your best to sell your goods within 30 days). Another way to get your company going is to keep your job, and start it part-time. This allows it time to find its feet. It keeps your overheads low while you get sales. As the Wu-Tang Clan says, ‘sales is power’.
Raising money is easier if you have some success elsewhere. Especially when it is in a related field. You will be able negotiate a better deal than a total raw start-up. People back people who know how to succeed.
If you have a digital idea that hasn’t been done before, it may be better to raise as much money as you can. And launch fast. That way, you grab the audience before a rival does. That is valid too. The counterpoint to this view can be found at theleanstartup.com, and it is worth a read for sure.
It can happen. Maybe you have had some good press, maybe the circle that you hang out in is very connected, maybe the idea has just captured the collective imagination — but for whatever reason, you have several people who want to invest. This is a good thing. You will now be able to negotiate better terms as a result. So the normal set of valuation rules fly out of the window. Also, you want your investors to be able to give you more than just money. Who will be a great mentor? Pearls of wisdom are hard to come by.
Ideas are important. But it will be the team who makes that idea happen. People invest in people, even more than they invest in ideas. A great idea with an average team will not succeed. Find people who are as good as you, but with a different skill set, and make them co-founder.
Are the margins good or great? As you scale the business, do your costs scale too? Are you selling gold for silver prices? What bit of the business model are you changing to allow you to offer something ‘better’, ‘cheaper’ or ‘faster’ to your customer? Just make sure that in the cold light of day, the economics are good. Don’t kid yourself.
Investors like to see that. They like things that can scale.
…but, you have to show that you have done the thinking. Business plans are a pain. But they’re not as painful as going out of business because you didn’t think it through..
The best businesses change something. So what are you changing? Customers like to be part of a company that changes something, and investors like to invest in new business models. Think on it.