Startup Money Tricks #1: Cash on the Table

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We’re going to be doing a finance series over the next few weeks titled “Startup Money Tricks“.

This is based on an observation from my tenure as EIR at Calgary technologies: at least 80% of startups have ignored significant untapped sources of cash when they start to look for equity financing.

Here are 10 reasons to look at as much alternative financing as you can before you go for venture money:

  1. Tactical Advantage: The more your company is worth when you start to talk to angels and venture capitalists, the better you do in negotiations. Every cent of cash you can bring in before negotiations improves your bargaining position.
  2. Better Investors: Sad but true: the unusual investor who will give you large amounts of cash early isn’t always the best partner for you. Of course, good investors will be a superb asset to you, and will bring much more than money to the table. But, with some conspicuous exceptions, the more you can validate the fundamental hypothesis at the core of your business, the better investors you’ll be able to attract. Many companies who attract very early investors live to regret it: the investors often wind up with board seats they’ve bought for a pittance, and they throw their weight around in ill-considered ways that create all kinds of problems. Often, early investors are poor investors because they don’t have the same skills that other, more-conservative investors exercise. The term “cram” was coined almost exclusively to describe how later investors have to deal with these rapid shareholders. Of course, your scheme might be SO interesting that you can interest a visionary, experienced investor in your idea at an early stage. But, by virtue of their very experience, they’ll “hose you”: see number 1.
  3. Sign of Competence: If you’ve been careful and ingenious in the ways you’ve financed the early stages of your venture, you signal to potential investors that you are, as my great-granny would put it, “Canny lads and lasses”. But if your potential partners see you have left promising sources of cash untapped, they’ll look at you with those squinty VC-eyes, and you’ll know you’re toast. Gives me shivers just thinking about it.
  4. Conservation of Management Time: The hunt for equity financing is often a huge time suck. If you want Angel or VC financing, you’re going to turn your management team into a road show: you’ll be going from city to city with your laptop and projector in hand to find money. And, once you do find it, you’ll be put through the time-consuming and expensive dual wringers of negotiation and due diligence. It’s not at all uncommon to see newly-funded companies who have lost their market advantage because they didn’t have the necessary execution power during the months they needed to get equity financing.
  5. Clarity of Concept Non-equity financing is often much easier to get, but it don’t, as they say, come easy. Just as you’ll need a business plan, some financial projections, and a presentation to talk to Angels and VCs, you’ll probably need them to secure most other forms of financing … you’ll even need them for some grants and government loans. There’s no faster way to turn a VC off than to put green, half-formed concepts and childish, badly-written documents on the desk. Look at the prep work for early, non-equity forms of financing as proving grounds in which you will refine your concept and message in front of less-particular but still-sophisticated audiences.
  6. Stealth: Not everybody has to worry about this one: VC money and Angel money can be noisy money. The VCs and the Angels aren’t noisy themselves: but the very act of trotting about with PPTs and business plans puts a buzz on the street. Buzz doesn’t always work to your advantage. While you can raise equity cash quietly, word eventually gets out about which companies want to raise money for which ideas. Other forms of financing can be much, much more private and more discrete.
  7. Focus and Control: As you move more deeply into equity partnerships with financiers, more people will influence how your company makes decisions. Anyone who has had a startup will tell you that the pre-investor stage is sweet, because you get to focus solely on the customer problem you’re trying to solve. When you can put the entire company in a Mini Cooper and go for Ethiopian at lunch, the firm can behave in a focused, obsessed manner that you’ll grow to miss. (Of course, you may not be able to afford the Ethiopian food when you get there…). Once the authority and control mechanisms of your company are spread throughout a larger group, you’ll spend more time dealing with that group and less with your problem domain … no matter HOW good the large group is.
  8. Network Growth: If you have a good idea, your network grows as you work on it. Inevitably, during this growth you’ll meet well-connected people who understand your problem set. If you’re lucky, this will lead to quiet introductions to VCs or angels who can see and appreciate what you’re doing … which means you don’t have to put on a road show, distract your management team, and make a whole bunch of indiscrete noise to attract investors. Usually a pretty good idea.
  9. *The “Bootstrap Gambit”: Absolutely the best time to negotiate for funding is when you don’t need it. You’ll get better partners, give away less, and raise more money if you can somehow get your company to the point where customers are giving you money and your basic hypothesis is proven. The best investor pitches contain the sentence “We have a conservative business plan that would allow us to do very well, but we think we can dominate the market almost overnight with your money and connections.”
  10. You’re An Idiot If You Don’t: If non-equity money is relatively easy to get, doesn’t vastly increase your risk, extends your operational capabilities, puts you in a better position in front of VCs, and lets you afford the odd Ethiopian lunch, why wouldn’t you do it?

Next entry: working the government grant structure in Canada.

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