Here’s the outline of a presentation/discussion I had with my mentor group of MIT’s Post-Doctoral Association. We spent the entire 90 minute meeting talking about how to finance a startup and could have easily spent another 90 minutes. A lot of interest from the mentee, many, many questions posed.
Financing a Startup
- Type of venture determines
how to finance it- Sole proprietorship – S-Corp
- Slow growth business – S-Corp or LLC
- High growth business – C-Corp
- Friends & Family money
- Angels & VCs may expect you to have friends & family invest
- Shouldn’t invest more than they can afford to lose
- Some investors expect founders to invest – see point 2 above!
- Keep in mind all the sweat equity you are investing
- Angels
- Wealthy individuals who are accredited investors
- Rule of thumb: must have net worth of $1 million +
- Tend to invest with heart as well as mind
- Angels can help, but also hinder
- Super Angels
- Extremely wealthy individuals who can write a six-figure check
- Relatively few on East Coast due to lack of IPOs
- May have incredible expertise & contacts
- A long shot for most founders
- Angel Groups
- Filling need for startup funding not being met by VCs
- Either group invests or individuals make their own investments
- Older angel groups getting more like VCs (not good!)
- Contact the managing director
- Convertible Debt
- Obviates need to value the company
- Preserves equity
- Investors get to convert their loan into equity at a discount
- Very popular with early stage companies
- SAFE
- Simple Agreement for Future Equity
- Variation on convertible debt but has no interest rate or maturity date
- Simpler than convertible debt
- See my post What’s the difference between SAFE and a convertible note?
- Venture Capitalists
- Most expensive money there is!
- Warm introduction mandatory
- Rocket fuel designed for scaling, not building
- Investment based on team, market & product
- CEO most important member of team
- Strategic Investors
- Motivated by strategic advantage as well as financial gain
- Rarely if ever lead rounds – you need to find a lead
- May cap your upside
- What is their added value?
- Usually only invest in first round
- Royalty Investors
- Don’t take equity
- Invest a sum in exchange for % of your revenue over time
- Must have steady revenue stream to qualify
- Very rare & hard to find
- Grants, Foundations & Contests
- Equity-free capital!
- SBIR grants for scientists
- Long & calendar-centric funding cycle
- Applications can be time consuming
- Awards can generate good PR
- Your Credit Cards
- Lots of tales about founders doing this
- High interest rates
- Might be a last resort in lieu of bridge loan
- Crowdfunding
- Kickstarter & IndieGogo the leaders
- Funding is not for equity
- Funders get some advantage: earlier shipment, reduced price
- Can succeed if you have a great incentive
- Incubators
- Small amount of capital – $100,000 for 6% equity
- Access to current founders & alumni network
- High quality mentoring
- Access to venture capitalists & angels
- The best are harder to get into than MIT!
- Customer Revenue
- NRE – Non-Recurring Engineering
- The best way to finance – no dilution
- Usually not the best way to scale
- Going Public
- The grand slam home run of entrepreneurship!
- Goal of VCs
- Advice & guidance of experienced CFO required
- Digital Tokens & Alternatives to IPO
- Check out JOBS – Jumpstart Our Business Startups Act
- SEC Regulation A+ – legitimizes digital tokens
- Direct listing – doesn’t raise money like IPO
- Tap capital markets with expense of an IPO
- Perform investor due diligence
- Study their previous investments (portfolio)
- Contact their founders
- How do they act when a venture stumbles?
- How deep are their pockets?
- Do they syndicate with other investors?
- What’s their added value?
- Resources
- Brad Feld: Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist.
- https://www.sec.gov/spotlight/jobs-act.shtm
- https://mentorphile.com/category/raising-capital/
- https://mentorphile.com/category/investors/
- https://www.quora.com/
- https://xconomy.com/boston/resources/angel-investing-groups/
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