Seed Funding For Startups: How To Raise Venture Capital As An Entrepreneur
Hey Dan, some friends of mine are thinking about starting a startup and they're wondering, do you have any tips for how to get some venture capital? - A lot of people want to get venture capital around from day one. Most companies, less than 1% of the companies are funded by angel investors. Less than 0.5% is funded by venture capital. So you think about most startups and founders fail to raise money that they need to start the business. Most people, actually start off with just family and friends and loans from the banks and things like that, right? It's very, very normal and it's very interesting because a lot of the time founders, want to raise money, but they don't know how right? because it's not taught in school. And there are some books on this, but you can't really learn this from a book. I mean, because very rare you have someone like an investor, sit down with a founder and say, Hey, let me tell you what you need to say in order to convince me to write you a check. I mean, no one's going to like, people don't do that and investors don't do they want to see, so yeah, tell me about your deal, tell me what you got. And then you have a lot of like videos or books out there.
They are written by people who are teaching you how to put together a pitch deck, but not how we think. So what you want to do is you get into kind of our mind of what are we looking for and you kind of reverse engineer. Then the chance of you getting the money is a lot high. But I can give you some tips, like what kind of tips are you looking for? - They're wondering, when do you approach an investor? - Oh, when is a good time to get the money? So I would say tip number one is you want to bootstrap as long as you could, right? I'm very much against the idea that, hey, I've got an idea, step one, step two, I write a business plan. Step three, I get a bunch of money, step four I get rich. That's not how this thing works. I'm a much stronger advocate of you and a few of your friends, you build something like from the garage, get to their minimum viable product, get out the marketplace, bootstrap as long as you could eat ramen noodles, that's okay for a period of time because it teaches you how to be resourceful. Because when this thing is not working yet, and you don't know if there's an actual need of a marketplace, you go out there and with a bunch of money, you only fail faster if the thing doesn't work, but when you've got no resources, you got to figure it out. That's why I don't believe that people say, Oh, I have an idea, I need this and I need X amount of dollars in order to make it work. I don't believe that. I believe if you don't know how to make money without money, you don't know how to make money with money. So without money, you got to be resourceful outside of the box, what do you have to do? Then you think about it, maybe I need to go sell something. Maybe I got to do this. Maybe I don't want to waste money on this Do I really need that office? Can I just do this from my garage, right? Do either we need to buy that new computer? Like all of these are very good attributes to develop early on as a founder. So I would say bootstrap as long as you could, because if you do it too early, someone like an angel investor, they come in with, pre-revenue no track record. They're going to want a big piece of the company, right? They're not going to say ... because the risk is too high chances of you failing is too high. They would say, Okay, I'll invest a little bit of money, but I want a big chunk of the company. So then, later on, it prevents you from, if you want to raise more money, it's very hard because you've already given up, for example, someone comes in, okay, I'm going to give you $100,000, but I want 80% of the company. Okay, I need the $100,000, you give up 80% of a company that 20% you can raise, maybe you and two buddies each get a little bit percentage. You can't raise more money, the deal it's done, right? But at the same time, the investor is not going to be like, I'm going to give you $100,000, I only want 1% of a company. They're not going to do that either. They have no control, right? They have no interest, it's not worth the time. So that's not good either. So for as long as you could, if you could do that, I wouldn't recommend bootstrap, does it help? - That helps but I think it's, the question then becomes who do you approach. - Ah yes, the short answer is people with money but that's a short answer, but I'll tell you the way you approach them. I'll tell you how most founders get it wrong. The best way to approach someone with money or capital to invest is actually don't ask for money. Okay, don't go and ask for money, ask for advice. Because everybody thinks about anyone with any significant amount of success. People go to them for three things, asking for a job, asking for a handout, or asking for money. They get this every single day. So if you're one of those people, they're like, oh, here's another one. They want something from me, right? Like we're very guarded, but when you ask for advice, it's like, okay, because almost all successful people from my experience, they're all very generous, right? Because most of them, they started from scratch, right? They've been where you're at right? They started from scratch. They've gone through a lot of mistakes and hurdles and challenges. So I see a young person, a couple of young guys and girls come together, hey, I've got this idea that's good. It's when you ask for advice and say I've got this idea. I'm thinking of doing this, this is the plan. When you ask for advice, then they're not thinking about you, you're trying to get something from me. So now they're emotionally invested.
They'll think, okay, well I think you can do this to this, and this and this. Now there are two outcomes you get out of it first, if your plan sucks, they'll rip it apart. That's good, you go back and fix it, right? And then you can come back. But if the plan assuming is very, very, very good, like you show them and then they are very impressed. They will naturally ask you, right? Have you ever thought about having a partner? Now instead of a seller, you turn into a buyer. Well, I never thought about that, you see I'm telling you how to sell me, right? I've never thought about that, but what do you have in mind? Well, I think you can do this and this. And then from there, it's 10 times easier because it is my idea, I came up with it, right? And then, so if it's the first case scenario, the idea is not good, but you go back and you fix it and then you come back with a revised product or plan.
Now, how do I feel as an investor? You're coachable and you listened, right? And you're an entrepreneur, you hustle, you can get shit done. Especially within a short period of time. I like it and if the second time you come back and it's really good now, the same conversation, maybe I want to invest, right? And then you don't want to jump the gun though. When they say they want to invest, you don't want to say, Okay, sure, here's the contract sign here. No, no, you'll be, oh let me think about it. I'm not here to look for money. You got to kind of push it away, I'm not. - Yeah, like I'm just looking for advice, right? And then let me ask you well how's the thing going right? Oh well, it's going good but we are looking for some capital to get out to the marketplace. What are you waiting for? I mean let's go, let's do this, right? And more than that, chances are within any successful investor. I probably have a network of people that I could introduce you to, that could get this thing launched, right? So that's how we think, so ask for money, ask for advice. - So that's the who and the when you see some people on hark Tank; and Dragons' Den and they're just horrible. Some of them are good. Somewhere in between all of that. What makes a good pitch and how do I do that? - I think a good pitch is personal. I think like an investor, I'm investing in you as much as I invest in a deal. So I want to get to know you, now I don't mean the, I don't want to hear the sobbing story, not the, oh, you know, I'm mortgage my house. This is the only thing I've got. I don't care what you're telling me. I'm going to make it work like you saw this on Shark Tank or Dragons' Den. I'm talking about, I want to know your motive.
I want to know why you started this company? What drives you? Because I know we're going to have obstacles, right? So the thing about investing, it's like a marriage, right? We're going to be together for a long time, at least three, four, five years before exit. I want to know, I can count on you as an entrepreneur, that you be resourceful and get stuff done and make stuff happen. So if you could demonstrate through a story that you have done that, that's why it's good to bootstrap in the beginning, right? That I know you're resourceful. You're not trying to get a bunch of money. You're not trying to do this stuff quickly. You're like, you want to do this, you want to make a difference. You want to get out into the world, I like all that. So a little bit of the personal story, what drives you, right? How did you come up with the idea that gives me an idea as an investor, your motive, once I know your motive, then I'm much more comfortable to invest in you as a person. Because in case, in my mind, this thing doesn't work. We can pivot. Maybe this product doesn't work. But if I like you, I like the team, we can tweak and make something work, that's okay. But product-driven. I'll tell you as an investor, this is just like myself. I don't know about other investors. Here's what I definitely don't want to hear. So why did you start this business? Oh, my friend and I came with the idea, want to make a whole bunch of money. That's a big no-no or we talked about, oh, I made this much money so far. And you pay yourself a big salary, right? A big paycheck every single month. So I know if I write you the check, a big chunk of that goes into just paying yourself. And the few founders that's not good. That means we're not on the same page, right? So I want to look at people who are customer-obsessed. They're thinking about, I saw this problem in the marketplace, it bothers me. It bothers this, I saw the opportunity. I think I could do something better. And I created this product and I believe this product is going to revolutionize the world. I believe it's going to make this difference. I believe it's going to be better than this, right? I don't want people to have this problem anymore. I love that because that's like the product, market, customer focus. But when it's like, hey, I want to do this. I want to exit in three years I want to make a whole bunch of money. Those people are not the right people because the minute things get a little bit easier I know, these people are they're not going to have to drive. So that's who I look for. So include, lead with that story, what drives you? And rehearse that a few times. So then when people, so why did you start this business? You can talk about this and this and this, right? It has to be real, of course, like not just make it up, but it has to be real, so that would be my tip. So assuming an investor likes you and they like your idea and they like your business plan, what else do they look for? I think one key thing that we all look for is a very clear path to revenue. Okay, so it's like the movie. Show Me the Money, right? Although we are customer-focused, I want to know how this thing's going to make money, right? Because from an investor perspective, a good investor at least I'm not thinking about how much money I would make. I'm thinking about how am I going to not lose my capital? How long would this last once I write that check? Are you going to come back to me next month asking for another check, right? So I want to see, now it doesn't need to be like, yep, we're going to hit these projections. This is what's going to happen. And if you don't make those projections, like this is horrible no, we know it's not going to be accurate. We know it's a wild ass guess, but we want to be very clear with how you're going to do the marketing, how are you going to sell? I'll give an example, so I was looking at a deal. The guy was telling me about, so I said, okay, you want this much money what're you going to do with that money? Well, I'm going to hire a digital marketing firm to do marketing for us to get out of the marketplace. Okay, I said, so exactly what's going to happen? Well, they're going to do some, pay traffic. They're going to get some SEO, they're going to do this to me, I'm already out. That tells me he doesn't know how the thing is going to make money. It is not very clear, It needs to be very, very clear, clear as, okay we've got an offer right now with an average cart value of 50 bucks, right? And I know we are now getting traffic for 30 bucks per unit. Each customer comes in, right? We are making a slight profit. And I know that we've done all this testing that we could scale, if we have a bigger budget, maybe the ad costs would go up, but we're still okay. Plus, we've got all these other backend products that it's coming down the pipeline, or it's already in place that we can make more money.
Every customer that comes in the door, right? And we've already tested Facebook, we've tested Google, we tested this, these are the metrics. So if you write me a check for X, this much is going to go towards this. This much is going to go towards that. And if it doesn't work. We're going to cut the losses and we're going to do this. You see the difference. That's what I want to hear. That's a very clear path to revenue. Not I'm going to hire some people. If the founder cannot clearly articulate how they're going to generate revenue in customers I'm out, it cannot be I'll pay some PR company, it cannot be, no and I also don't like, oh, I'm just going to call more people. I'm going to hit the pavement, I'm going to hustle. Not that you don't want to hustle, but tell them assuming that you don't have a plan. What if you hustle and it doesn't work, then what happens to my capital? But I want to see like, I want it to be safe. So how can you ensure me as an investor that it's safe is protected? I want you to hit the pavement. That's like manual labor does that at the same time I need to know this, it's going towards something that's getting a return.
Now, I don't expect it works perfectly. You might run some ads. You might do something that it doesn't work, but I want a plan, so that's what I will look for. - So that's everything thing to do right. Yeah. What's the biggest mistake that people always make? I would say the biggest mistake is they exaggerate founders, startups tend to be very optimistic. So then they would. Everyone's business plan is perfect. Everyone's the projectionist, oh, I'm going to grow by 40% every year, and then we're going to do this. We're going to do that, it never happens that way. It only, when I sit down with a founder, they're overly optimistic. It just tells me they're not experienced. I want to hear, tell me what could go wrong right? What if it goes wrong? What are you going to do, right? What if that also doesn't work, what are you going to do? How long would you last? How long would this cash last? So thinking that through don't exaggerate numbers, I actually prefer, they actually under promise and over deliver that they think I think the growth is going to be like this. When you look at a lot of people, they come in, they value the company at such a ridiculous level. Oh yeah, we are making, 5K a month, but the companies worth $2 million. Where's that come from, right? Oh yeah no, because the potential marketplace, it's a billion-dollar market and we get 0.1%, the marketplace it's going to be this many people and it's going to do this and we can expand this. These are all BS, right? What we want to hear, I much prefer much more comfortable.
We want to focus on this small market. We're going to grow that. We're going to get some loyal customers as we grow the next plan of action, we're going to expand it, these ways, right? And if in case that doesn't work, we can do this, right? And if that doesn't work, we can do this, right? So I want to hear what could go wrong, right? And again, how are you protecting my capital? So I think one of the keys, the lessons that I want you to remember, you got to treat the investor's money, even more seriously than your own money. It cannot just be other people's money. So whatever no, you got to treat it even more seriously than your own money. Because the investor is any good, chances are, you probably would go back to them. When you do the second or third round possibly you want him to keep investing with you, right? But if you burn that, that's it. And then guess what they tell other people about that too. So you can forget about trying to get money from other people, you can only burn someone if the circle is so small, right? I would say that treat their money like yours, if not even more serious than yours. That's what I would say. So if we're going to an investor and they say, you needed to grow some more, would you recommend going for crowdfunding, as a Kickstarter to be able to show our growth and our market value? Absolutely, I think the best funding model, I believe that I have used all these years is actually what I call a customer-funded model. So you actually go and quote, unquote, raise the money. Meaning you sell something to your customers. You let your customers fund your growth for the next phase and the next phase and the next phase, the reason being is this because people vote with their wallets. So you could say, I've got this great product, I think is great software. I want to get out to the marketplace, how do we know? You don't know, but customers buying we know right? Then they will tell you, I like it. Or what if you spend a year developing this and you get out there in the marketplace, no one wants to buy it. It's already not working, right? But if people like it and they buy it, you're building a little track record and you take that little bit of money and you go to the next stage or you're using like Indiegogo or Kickstarter to launch something. Again, if the launch is not successful, there's a chance that maybe the marketplace is not looking to buy what you sell. And it also, from an investor perspective, here's the difference. When you come to us with a business plan, it's a dream it's an idea. But when you have done a little bit of crowdfunding and usually crowdfunding, you're not even giving away any equity, you give a free product and things like that. So you still have all your equity or your own money, or you already show that, hey, you've sold to this group of customers, your first kind of raving fans of 100 people. That's awesome. You come to us and say, with my experience, my limited resources, I've gone into this far. I'm in a place where I'm giving the script. I'm at a place where I'm looking for mentorship guidance, capital to go to the next level. Because I don't know what I don't know, right? So see there, you've got a good thing going on. It's like, you're talking to an investor, would you like to be part of this, right? And then as an investor, and now I'm thinking, hmm, you've got a good thing going on. Look, I'm thinking about all the resources I have. You could piggyback what I have, right? Mark Cuban does this a lot on Shark Tank. He buys something that's kind of a bolt on to an existing business that could sell to his existing customers or share technology or whatever it might be. He knows he can multiply this thing overnight, very smart.
All the investors think that way if they're investors. So you've got a good thing going on, I want to be part of it versus you've got a plan. It's like, you're looking for the investor to save you or rescue you. That's not what they're thinking. That's what a lot of founders are please save me, I've got two months, I'm running out of cash, please invest. That's not how they think they're thinking, okay, you've got a good thing going on. I can add value, I can leverage my network, leveraging my contacts, I'll leverage all the resources. My risk has a minimum, right? That way I can get my money back. The sophisticated investor, they're not thinking about just, return on investment. It returns off investment, right? When can I get my money back? Because of the minute, if I invest a million, I can get my money back. Everything else, it's just, returning gravy. But if I invest a million, I can make X amount. But if I lose a million that's capital that I've lost, that means I need to take capital from other things I have, or the capital that I have from other things to put into this, to keep this going, that's not good. That's not a smart investor. So I think it's great, sell something. And then also, when you sit down with the investor, it proves to them, you could generate revenue. You could sell, right? You're not afraid to sell, you know how to market because otherwise, you would not have gotten those customers. I'll tell you like music to our ears is I saw this problem. Here's my story. I created this product. I didn't even know that it will work, but I got in the marketplace and somehow I sold X amount of units without a ton of advertising, without a lot of resources. But now I need more distribution. I need more exposure, I need whatever. - It's version two. - Yeah, like version two. And I know that's what they've been asking for they've got people to order backorder they want this thing, but I can fulfill it, you can hear this from Shark Tank. That I can fulfill the order because of this now investors like, okay, that means the minute I write you that check, you're going to put it to work, to bring in more dollars. Not I'm going to write that check and see what is going to happen. We don't know what we like, so I always believe that if you've got the customers, the investors will follow.