Monday, August 5, 2013

5 Ways To Attract Money

Karsten Strauss
Karsten Strauss, Forbes Staff
A journalist covering entrepreneurs, technology & business.

You’re a young company with an interesting product in development. You’ve watched a few startups rise to glory, watched others crash and burn. Undeterred, you’re sure you can make. All you need is a bit of cash to get on a growth track and inch closer to profitability and success.
But how do you go out and get that growth capital?

You could bootstrap it by cutting your expenditures down to almost zero, living on dehydrated noodles and doing laundry at mom’s place, but that will only go so far. There’s always crowdfunding, but to get any attention doing that you need a seriously unique or wacky idea like or a shake that replaces food or a film about Nazis living on the moon.

There’s always a bank loan, but even if you can get it that’s just money with interest attached and it would be great to get cash plus contacts and guidance. Venture capital is always an option.

“I see a healthy venture capital market for startups,” said Charles River Ventures’ George Zachary, who led his firm’s investment in Yammer (acquired by Microsoft MSFT -0.14% for $1.2 bln. last year). “I don’t see any shortage in venture investors wanting to fund startups.”

Maybe venture capital or angel funding is the way to go. But how do you make the bigwigs at a venture capital firm deign to cut you a check?

Here are some tips that may help you fund your enterprise:

1 – Disrupt Something
Getting in between an established competitor and its cash cow is tough, but lucrative when you can pull it off. Disruptive products and technology can help your company eat the lunch of the bigger players in your space and if you can convince an investor that your business model can accomplish that – even a little bit – that investor will see the rewards and be more willing to help you grow your idea.

“We’re looking for truly non-linear companies that disrupt large B-to-C and B-to-B markets,” says Jason D. Whitmire, a partner with Earlybird Venture Capital. “Usually these teams have to have a very strong (tech) DNA. That means technology at their heart. Ideally they’re all very techy people. Increasingly, I think, businesses that build engagement or networks leading to a high degree of defensibility are extremely attractive.”

2 – Have A Touch Of Experience
It’s not necessarily expected for startups to be filled with battle-hardened business veterans, but having a couple on your team that have seen a funding round or two at other young companies definitely doesn’t hurt.  Venture capital firms feel better if they know they’re not handing a wad of money to a roster of newbies. 

“Guys and gals in the 20s produce some phenomenal stuff but typically we’ve seen that out hold periods – the lengths that a venture capital company sits on an investment – are dramatically shortened with one or two people who have played the game before,” Whitmire said.

Zachary agrees: “These people know that this is not necessarily going to be easy all of the time and to expect the need to continuously stay focused on the reality of the business, on the day-to-day metrics and realizing that there’s usually a winner that takes all and wins most of the valuation in a market space and that being number two or three is really not a great place to be.”

3 – Be Efficient, If Not Profitable
Profitability is milestone you won’t forget and a major sign that your young company is on the right track. But it is not necessary to attract venture money or angel interest. In fact, most investors would not even expect you to be profitable if you operate in certain spaces.

You may be losing money but remember that how you deal with the money you are making can show how cost conscientious and efficient you are. Those spending tendencies and professionalism will send a message to those contemplating an investment in your startup. Growth is paramount and having a burn rate of below $200K per month for a company of 12 emplooyees or less is compelling. “That’s gonna be the sweet spot,” 

Whitmire said. “Once we’ve figured out how the engine works – figured out what the return is for every marketing and sales dollar spent – that’s where you can pump it up and go a half million burn a month. As long you’re truly growing.”

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