In my last post, I wrote up the stories and lessons from three entrepreneurs in mobile who participated on Sachin Deshpande’s recent panel about raising money:
- Andreas Ehn, Co - Founder & CTO, Wrapp
- Vamshi Reddy, CEO & Co-Founder, Apalya
- Derek Fears, Co-Founder and President of Product & Marketing, Emprego Ligado
Here are more of their experiences and insights on getting startups funded.Lower Infrastructure Costs
With the growing availability of cloud-based computing and services, fewer startups need to spend their money on hardware. “In the early days of Spotify (2006-07),” recalls Enh, “we spent weeks looking at data centers and negotiating with hardware vendors, then finally co-locating. When we started Wrapp five years later, we didn’t need to buy any infrastructure. Higher and higher layers of business service are available in the cloud, so you get more and more stuff without having to buy or do it yourself.”
This has changed seed funding in particular, since startups can lower their initial costs and get products out faster. And for later rounds, notes Reddy, cloud resources make it easier to put up a prototype to show investors.Changing the VC-entrepreneur balance
Those lower costs can affect the VC-entrepreneur balance, Enh believes. “Large, traditional VCs with hundreds of millions of dollars need a portfolio of about 200 companies to do angel investment properly. Anything that lowers the cost of starting a business may present VCs with the problem of keeping their money active.”
Besides VCs, it’s helpful for the ecosystem to have angels and accelerators willing to invest, says Fears, especially in Latin America where there are fewer institutional investors. “There’s also a growing community of 25- to 30-year-olds,” he adds, “who have had a couple of successful exits and want to invest $50-75,000 in first-time entrepreneurs. Those investors add a lot of value because they are willing to coach and mentor.”Terms vs. valuation
In the offer, what’s more important for the entrepreneur to examine: terms or valuation?
Of course, the press will focus more on the valuation, but the terms are your agreement with the investors and you’ll have to live with it (and them) a long time. Every VC claims to bring a certain added value to the table, assuming that you as entrepreneur go after it and make use of it.
Fears points out that valuations in Brazil vary little, but terms can vary wildly, especially among angels with no VC experience. “You may have to walk away from deals poor and broke because you can see that the terms will doom you later,” he warns. “Some investors look at funding as a kind of restructuring, saddling you with debt, treating you as if you’re in credit default and imposing harsh management requirements. That’s not conducive to the success of early-stage companies, which need flexibility from their investors to find product-market fit and grow the business.”Crowdfunding
Panelists agreed that crowdfunding sites (e.g., Kickstarter or Indiegogo) are not so much funding as pre-sales. Instead of selling shares in your company, you’re able to sell things you haven’t yet made and use feedback to determine whether you have a marketable product.
“Our angels and strategic partners have opened a lot of doors for us that crowd investors can’t open,” observes Fears. “If you just want to sell a tangible product and need up-front money to take to the manufacturer, crowdfunding is useful. But if you’ve been unsuccessful in crowdfunding and you then try to approach investors, they may point out that you’ve proved your idea won’t work.”Traction
Regarding traction, or acceptance of your idea in the market, Reddy says, “For angels, basic customer traction is enough to start raising money. It’s the level at which people are accepting the product.”
When you’re going for seed funding, low costs are fine, says Fears, but in Latin America the ability to demonstrate traction is more important because it separates you from the rest of the pack. “We faced a climate of short run rate and thin funding, so we had to plow our money completely into user growth and non-product development for greater traction. Because the growth in our user base was good into 2013, we waited until the last minute, when it was at its peak, to go out for more financing.”Cobbling small offers together
After all the work of finding willing investors comes all the work of pulling their offers together, which can be like herding cats. It’s to your advantage to use other VCs to get optimal terms, but if you overplay your hand or try too hard to push them all, you may lose some investors to deal fatigue.
“During your seed round,” says Fears, “VCs won’t pay for your attorneys and they don’t want you to use theirs. That meant that we had to read and approve our own documents, incorporating and circulating comments from several different VCs we were trying to bring together. In early-stage financing, this is up to you, and it’s a lot of work.”
Deshpande advises that entrepreneurs find a mentor to guide them through this, “preferably someone who understands your business. Rely on lawyers to look at things in black and white, but turn to someone who has gone through it to advise you on how to pick your battles.”Next Steps
So, are you ready to get funded?
- Watch the video of this panel session, “Tips on Raising Funds in Today’s Financial Environment.”
- The Qualcomm Ventures QPrize competition is accepting business plans through April 18, 2014. Find out more about the international seed investment competition featuring $100,000 in regional prizes and a $150,000 grand prize.