« OK, Cheney isn't right too often | Main | Heading to the Big Ballpark in the Bronx »

Entrepreneurs can step up, too

I've written regularly about how Boston-area VCs need to step up and take some risks in order to foster some market segments, such as Web 2.0 (posts here and here).  Many entrepreneurs have told me that VCs in the area aren't willing to back them unless they have a team that has done it before with a site that has a lot of traction and already generating revenue.  That doesn't sound like real early stage investing to me.  And, I hope to see it change.

But, entrepreneurs have to be willing to take some big risks, too.  There are other ways to fund a start-up besides a VC.  Maybe venture capital is the only way to raise millions at once, and that kind of investment can only be justified in something that has a chance to scale rapidly and build significant value.  But, plenty of start-ups have gotten going with other forms of financing:

  • Angel investors -- in Boston, the angel groups are very active.  They don't move any faster than VCs, but they are willing to fund riskier ventures than typical 'early stage' VCs.  Also, there are many entrepreneurs who can find individual angels from their industry who are willing to back their ideas.  Geezeo and Good2gether are examples of this.
  • Friends and family -- this is probably the most common way that start-ups get going.  Who knows the entrepreneur better than their family and friends?  While not every entrepreneur has friends and family with the resources to back them, a scrappy entrepreneur can do a lot with a modest amount of capital.  Earlier in my career, Cayman Systems started this way.  Also, CircleLending has formalized many business loans between friends and families to get businesses off the ground.
  • Do some other work for funding -- a lot of companies get started with the team doing related work for pay (consulting work, licensing software, selling something related, etc.).  This may divert some attention from the core business, but it does keep people paid.  This will require extra effort on the team's part to do the revenue generating work as well as the 'new business.'  But, it gets you going.  Not many people know that one of my former companies, Shiva, was originally funded by doing driver work for a hard disk company.
  • Fund out of your own pocket.  This is the riskiest form of financing for the entrepreneur, but it is done.  Some people have some resources from previous success that can provide them a financial cushion.  Others are willing to make a big bet on themselves and their idea.  GateRocket and MyDesignIn are examples of this.  GateRocket went on to raise formal angel funding afterwards.

Many times when I meet with entrepreneurs, they won't get going unless a VC gives them money.  Now, for certain businesses, this is wise.  A business that has to compete with venture-backed direct competitors who are ahead of it, or one that will need millions of dollars for R&D (like a semiconductor start-up) may very well have to raise venture capital to get going.  But, most Web businesses don't need large amounts of capital to get going.  Some money is needed, but a lot of work can be done on more of a bootstrap basis.

Although the most committed entrepreneurs are willing to do whatever it takes to get their business off the ground, others are too willing to accept a 'No' from a VC.  This is a good test of commitment.  I am always impressed by entrepreneurs who have pulled off amazing things on modest amounts of capital because they were determined to get it done.  So, don't let a VC's 'No' slow you down.  Find another way to fund your business and prove the VC wrong.

If you don't have the guts and determination to do this, maybe the VC was right after all...

TrackBack

TrackBack URL for this entry:
http://thefeinline.com/blog-mt1/mt-tb.fcgi/184


Hosting by Yahoo!

Comments

This is a useful description of the set of potential solutions to early funding.

There is a media driven perception gap between what an east coast vc does (perception: provide high risk capital to NEW ventures) and what you actually do (invest in nascent businesses where the founders have already created some traction).

Articles, such as this one, that give a realistic assessment of what you do would have been EXTREMELY helpful to me when starting my firm and would have helped me avoid a couple of false starts.

Because it is "sexy" a lot of vcs want to maintain the media driven image, but the bottom line is: it's not who you are. Stop pretending it is.

Either: Stop bemoaning the fact that there is little early stage investment, OR put your money where your mouth is.

If you don't see the risk/return from early stage investments, why would you expect others to?


Nic and I bootstrapped Foneshow for the first year. If you've got a founding team (unpaid) with the core skills to execute on the plan, then bootstrapping works really well because salaries are a major expense. AWS has helped a lot in keeping expenses low. Being virtual has helped a lot in keeping expenses low. Open source SW has helped a lot in keeping expenses down.

In terms of cold hard cash, we spent about $20K on Foneshow in year one. That cash came out of our pockets. Mostly savings and consulting work. No one has been paid yet.

Now after 12 months of work we have a solid product offering, a user base, major programming partners, and revenue (a little). After building all that, we THEN raised a small VC round of ~$1 million. At that point you're not just selling an idea and a plan, you're selling a demonstration of your ability to execute against your plan.

Post a comment

(If you haven't left a comment here before, you may need to be approved by the site owner before your comment will appear. Until then, it won't appear on the entry. Thanks for waiting.)