Funding a startup: Deciding how much money to raise (TechRepublic)

By Conner Forrest August 18, 2014

Raising venture capital can be a confusing process. Here are some things to think through before you raise a funding round. 

Startup communities, such as Silicon Valley, are some of the few places in the world where money isn't a taboo dinner conversation. The normalization of financial talk among founders is predominantly due to the fact that it is a necessary part of startup life. It's just part of the game.

Still, just because the fundraising process is easy to talk about, doesn't mean it's easy to navigate. By knowing the amount of money you want to raise, and what you want to to do with it, provides comfort to both the founder and the investor -- founders get a plan of attack and VCs get the comfort that founders have thought it through in a comprehensive way.

Alex Rosen, managing director at IDG Ventures, said that it starts with asking a question.

"What is your goal?," Rosen said. "Capital itself is not the goal, it's the enabler to get to the goal."

Is your goal product development, product/market fit, sales expansion, market dominance, or even world dominance? In the startup world, money is the enabler to make those things happen.

Determining the proper amount of capital is often a Goldilocks situation where one amount is too little, another is too much, and one is just right. While there are many factors that can play into how much money a company should plan to raise, but there are some tips and tricks that can help the process along.

Raising a little

The concept of running lean which, among other things, promotes the tenant of raising as little capital is possible is one of the fastest growing trends in VC-backed startups. The idea comes from the Lean Startup concept made famous by Eric Ries, and there are some benefits to raising little or no capital.

The first benefit is the fact that less money typically requires less equity in exchange. This is the concept of dilution -- meaning the founder's ownership is company is "diluted" by the amount of equity that he or she trades for capital. This is why early stage capital is typically referred to as "more expensive," because the risk often necessitates a higher equity trade for the money.

"You want to raise a little money as possible to prove your product/market fit, or service/market fit," Rosen said.

Limited capital also enforces discipline and focus, especially in the early stage. Less money means you have less room to make mistakes and some people thrive under that pressure.

However, you will be forced to make difficult decisions without as much money, including layoffs and restructuring. Many businesses even fail because they run out of money. When it comes to fundraising, everything will take longer and cost more than you expect. As an entrepreneur your goal should be building your company, not looking for money.

"I think that the biggest problem, to be candid with you, is most people don't raise enough money," said Jordan Levy, a partner at SoftBank Capital. "I think that most entrepreneurs are far too dilution sensitive, and forget that what's most important is giving them the runway and traction to have the opportunity to follow and fulfill their dream."

If you don't have enough money to make it to a certain milestone, you might not be able to raise more capital. According to Nick Sturiale, a managing partner at Ignition Partners, if you don't raise enough capital to get past the risk reduction milestone, you are looking at an insider led round, which is a negative signal to outside investors and a sign of desperation.

"Once there's a whiff of desperation around a company, future fundraising is probably compromised," Sturiale said.

Raising a lot

There's something to be said about the comfort money brings. Although, what is considered 'a lot' of money will depend on your company's business model and revenue model. For example, a B2B SaaS company will look different than a consumer hardware company in terms of fundraising rounds. Hardware companies traditionally require more capital because they will not be able to bring in revenue until they have built produced a physical product.

"Capital itself is not the goal, it's the enabler to get to the goal."Alex Rosen

One of the main reasons to take more money is the simple fact that it means you can spend more time working on your company and less time trying to keep your coffers full.

"You don't want entrepreneurs always being in the market raising because it's time consuming, it's distracting," said Ira Weiss, managing partner at Hyde Park Venture Partners.

Raising extra capital also gives you time to refine your product before taking it to market. There is often less stress involved and it gives you the ability to account for adjustments and mistakes. There are risks in taking extra money, but they are hotly debated.

"The most likely exit scenarios for your business can justify whatever amount of money you're raising," Weiss said. "If you think the exit can only be $50 to $100 million, you don't necessarily want to be raising $20 to $25 million."

Remember, when you cash out on your startup through an exit, the investors get paid first. So, if you take too much money relative to your exit price, you could end up with a less-than-stellar return on your hard work. But, some VCs contend this argument, as an investor will likely have the industry knowledge to not put themselves or the founder in this position in the first place. As Levy put it: "No one's ever raised too much money."

An alternative option is running lean early, until you have a product/market fit, and then taking all the money that's available. Because, at that point, you know there is a real business opportunity and you it's up to you to make it happen.

Rosen notes that raising too much too early can cause you to lose focus and be tempted to pursue too many things. He also said that while laser-focus is key, it's difficult to scale a company on a budget.

"The one mistake from which you can't recover is running out of money," Rosen said.

Raising for the right reasons

One of the most difficult parts of deciding how much money to raise is deciding how you are going to measure your capital needs. Some companies start with the amount of time you need to be operational.

Weiss said that, for most companies, a good rule of thumb is 12-18 months, or 18-24 months of operating costs in an extreme case. Much of this has to do with whether or not you have the details of the business ironed out yet. If not, a safe timeframe is probably 15-24 months.

Other VCs believe it is incorrect to look at fundraising and growth in a sense of measurable time. Investors and entrepreneurs that fall into that camp typically think of it in terms of company milestones; and those milestones can be prerequisites for future rounds as well.

When I say "milestone" what I am referring to is a specific, measurable point in a company's growth that is a metric of success. For example, a milestone for a SaaS company might be achieving a specific monthly recurring revenue (MRR). For a B2B subscription service, it could be reaching a certain number of customers and pipeline. Other examples of metrics could be measurements of engagement, acquisition, and monetization.

Sturiale, on the other hand, believes that it is a combination of both time and milestones that help make the best decisions about the amount of capital to raise.

"Innovation is very difficult to schedule or forecast and we, as a human species, are inherently biased when we forecast beliefs about the future when we're involved in it," Sturiale said. "Forecasts are inherently optimistic and forecasts are always 100% wrong at the early stage. So time does become a component because, more often than not, this is going to take longer than you think and cost more than you think."

The mentioned the idea of raising a "buffer" to account for any hiccups along the way to a milestone. That way, even if you don't make it a specific milestone, you have enough capital to keep your head above water while you figure out what to do.

Fundraising is a confusing, complicated process. It's implications are deep, but it can be the fuel you need to take your idea to the next level. It's necessary to properly think through exactly how much you need raise, but you should also consider who you are raising the money from.

"When you take a venture capitalist's money it comes with strings, irrespective of the terms," Levy said. "Irrespective of the terms the fact of the matter is, when you take our money, we control your business whether you like it or not."

Conner Forrest is a Staff Writer for TechRepublic. He covers Google and startups and is passionate about the convergence of technology and culture.

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Tricks ...Entrepreneurs (BusinessWeek)

By Karen E. Klein August 11, 2014

Last month, Bill Gates revealed his favorite business book. Business Adventures, a formerly out-of-print collection of New Yorker essays by the late journalist John Brooks, chronicles business lessons learned, including Ford Motor’s (F) Edsel flop and Xerox’s (XRX) failure to capitalize on its own research and development. “Brooks didn’t boil his work down into pat how-to lessons or simplistic explanations for success,” Gates noted.

The book is unusual in part because inspirational memoirs and “12 Easy Steps to Success” drive the business-publishing market and lecture circuit. After all, what entrepreneur risking everything on a startup wants to read a cautionary tale—let alone an outright downer?

The problem with the overwhelming focus on success is that valuable insights from failure are drowned out. This tendency is called “survivorship bias,” says author David McRaney, who writes and speaks about cognitive biases. “The advice business is a monopoly run by survivors. When something becomes a non-survivor, it is either completely eliminated, or whatever voice it has is muted to zero,” he says.

STORY: Failed Entrepreneurs Find More Success the Second Time

What makes survivorship bias so insidious is that winners may not really know why they came out on top. In fact, luck and timing probably played larger roles than most realize or will admit, especially those busy trumpeting their incisive strategy and bold leadership. “A stupid decision that works out well becomes a brilliant decision in hindsight,” McRaney says. “If you bet everything on this one hunch and it works out, you succeed.”

When entrepreneurs ask me for book recommendations, I always start with Billion Dollar Lessons: What You Can Learn From the Most Inexcusable Business Failures of the Last 25 Years. The title often elicits puzzled reactions. I explain that I interviewed co-author Paul B. Carroll, co-founder of the Devil’s Advocate Group, when the book came out, because a systematic study of failure was long overdue.

But Carroll told me that it wasn’t easy to get the book published, and, despite great reviews, Billion Dollar Lessons didn’t exactly fly off the shelves. “I’d say the general reaction was: ‘Great idea. High time someone looked at the lessons to be learned from failures. I’d love to read that book.’ But not enough did,” Carroll wrote in an e-mail.

STORY: I Started the 'Bank of the Future' While Still in School. Here's What I Learned

Having witnessed a few devastating business flameouts up close, I wish more people would get the full picture before they take the leap into business ownership. McRaney tells people to correct for the natural human bias toward happy stories by seeking out examples of failure and learning from them. “Really, always think to yourself: What is missing from this story? When you’re looking for advice from a person who’s only telling you what to do—but never saying what not to do—you’re getting a biased view of the world.”

When I wrote a column about failure stories a few years ago, it wasn’t easy to get entrepreneurs on the record. Those who did talk to me were more eager to discuss their current business successes than to dissect their previous failures.

Yet a new study suggests that people who try and fail at business are far more likely to succeed if they pick themselves up and start over again. Maybe if more entrepreneurs fessed up to failure—and more would-be entrepreneurs listened to them instead of succumbing to survivorship bias—the pitfalls of startup ventures could be avoided more often.

STORY: B-School Reading List: The Secret to a Successful Career? Don't Be Passionate or Demanding

McRaney applauds Silicon Valley’s failure culture and says he hopes it will catch on outside the tech industry. Success, as he defines it, is “serially avoiding catastrophic failure while routinely absorbing manageable damage.”

Now, if only he could turn that into “Nine Easy Steps,” he just might have something.

BLOG: Communication in the SAT Classroom

Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.

China's Corruption Probe of Ex-Security Chief Widens (BusinessWeek)

Zhou Yongkang, the former security boss now being investigated for corruption, had a wide network in China. The chart shows the number of Zhou’s associates, most of whom have become targets of the growing probe.

Government Agencies Fail to Hire Women-Owned Businesses, Again (BusinessWeek)

By Patrick Clark  August 04, 2014

The Small Business Administration announced its annual tally of federal contracting results on Friday, and the results were familiar: The government failed, yet again, to meet its target for awarding 5 percent of contracts to women-owned small businesses. In the 20 years since Congress set the 5 percent goal, the federal government has never hit its mark.

About 4.3 percent of total contracts went to women-owned businesses, according todata available online. That amounts to $15.5 billion, $2.3 billion short of the goal. Over the last 20 years, these kinds of missed opportunities have cost women business owners at least $63 billion, according to a recent report from the Senate Committee on Small Business and Entrepreneurship.

The biggest culprit was the Department of Defense, which fell $3.3 billion short of its target for awarding contracts to women-owned small businesses. The Department of Energy awarded $321 million in contracts, or 1.5 percent of its total spending, to women-owned small businesses. The DOE has argued in the past that the nature of the agency’s work makes it difficult to contract with small companies.

BLOG: Corporations Promise Obama They'll Pay Small Businesses Faster

Of course, the targets are just targets. There are no real consequences for falling short. The goals, and the annual reporting of the results, are a bit of political theater, allowing the SBA to cheer on agencies that fare well, and shame those that fall short of goals.

This year, the SBA actually had some success to trumpet. For the first time since 2005, agencies hit their target of awarding 23 percent of contracts to Main Street. We’ve known that was coming for a while, but it may offer some encouragement to female small business owners: If they’re really, really patient, they might get access to their share of government jobs eventually.

BLOG: Expensive Small Business Lenders Are Unregulated. Should They Be?

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

When the Cemetery Fills Up, Sell Tickets (BusinessWeek)

By Patrick Clark  August 05, 2014

Green-Wood Cemetery in Brooklyn, N.Y.

A 756 square-foot mausoleum site in Green-Wood Cemetery in Brooklyn, N.Y., will set you back $320,000, enough to buy a big boat or a (very) small apartment nearby. The high price of an indoor burial space–one bigger than some New York homes—is perhaps the most rarefied of rich-people problems, but it’s indicative of a broader trend: New York’s cemeteries are filling up. Green-Wood will hit full capacity in five years, and that’s driving up the price of real estate in the hereafter for rich and poor alike.

As my Bloomberg News colleague Flavia Krause-Jackson reported, the global funeral industry is adjusting. That includes catering to an increasing preference for cremation and building burial sites offshore and in mid-air. Green-Wood’s strategy is a little different: It’s selling tickets.

The cemetery, built in 1838, is the final resting place to Leonard Bernstein, Jean-Michel Basquiat, and a half-million others. It has been trying to attract history lovers since at least 2002. In recent years, the nonprofit cemetery has taken to selling memberships and charging admissions fees for outdoor yoga classes and trolley tours. An upcoming tour built around the grave of a 19th century whiskey distiller, which costs non-members $30, has already sold out.

STORY: JPMorgan Chase Moves to Brooklyn

Green-Wood isn’t the only New York cemetery to pitch itself as an historical destination. Woodlawn Cemetery in the Bronx has offered foodie-inspired tours, which includes a stop at the grave of the pioneering bartender Jerry Thomas. Cypress Hills Cemetery, on the Brooklyn-Queens border, is the site of an annual road race called the “5K Run Through History.” Maple Grove Cemetery in Queens hosts concerts and poetry readings.

Elsewhere, graveyards have sought to use mobile technology to make themselves more accessible to visitors. Arlington National Cemetery, outside Washington, built a smartphone app to help visitors navigate the graves of U.S. military veterans. An crowdsourced genealogy project called BillionGraves is seeking to catalog headstones around the world and charges $9.99 for premium memberships.

Programs to make cemeteries more tourist-friendly sound vanilla, compared to other solutions for the lack of burial space, such as a floating cemetery off the coast of Hong Kong, or a Houston company that will launch your pet’s ashes into space for $995.

STORY: Groupon Founder's Next Big Plan: Audio Walking Tours

New Yorkers who don’t want to go to similarly extravagant lengths can partake in a time-honored tradition among city dwellers who seek lower real estate costs and more space: They can look for a cheaper plot in the suburbs.

Clark is a reporter for Bloomberg Businessweek covering small business and entrepreneurship.

The creation and evolution of a startup business plan (TechRepublic)

By Conner Forrest April 21, 2014
Some startup founders regard now business plans as superfluous, but they remain a valuable tool. Here's how to turn your business idea into a roadmap for the future. 

Entrepreneurs tend to follow the "don't think, just do" model of starting a business. This gumption can serve founders well in the early days, but it often causes them to overlook some of the essential aspects of building a business.

Writing business plan is a valuable experience for any company founder, but many founders view it as a useless exercise. Much of this has to do with the parameters by which a business plan is defined. In simple terms a business plan should be a document that forces you to look at where your business is now and where you want it to go, and make decisions relative to that trajectory.

"The reason you need a map, the reason you need to have any sort of plan is because, if you don't know where you're trying to go, you don't if you're any closer to it," said Andreas Stavropoulos, managing director of Draper Fisher Jurvetson.

Your business plans will exist in different forms for each stage your company is in and it will prompt new actions for each set of goals you set out to achieve. Founders usually begin to think about their business plan when they are first seeking funding, but according to startup lawyer Peyton Worley of Cooley LLP, raising your first round might not require a full-on plan.

"A traditional business plan may or may not be appropriate. But, something that is concise, portable, that easily shows what you're doing, as well as the quick core story of your product or technology, that you should definitely have," Worley said.

That "quick core story" will become the foundation for your pitch.

Crafting the pitch

The pitch is an essential building block for the business plan of your startup. The pitch pushes founders to evaluate how they define their business and, the majority of the time, it is what potential investors are looking for.

"What matters is the entrepreneur's ability to communicate the unique insight and inspiration of their idea along with it's scale (why it's a really big market opportunity) and it's defensibility (why they have an unfair advantage based on unique intellectual property, technology, data, network effects, or something that makes it hard for others to imitate). These concepts are best communicated via the passion of the entrepreneur," said Bain Capital Ventures' Scott Friend.

When you're first launching a startup, a traditional; business plan might not be wholly necessary. A business plan might help to show that you have preempted some of the questions that investors might ask, but it's not something that VCs will want to sift through. Most VCs consider the founder, or team, more important than the business; and a quick pitch conveys more of the entrepreneur, and his or her vision, to the VCs. So, keep the business plan short and focused on the pitch when you're first launching.

When composing your pitch, keep it short and use lots of pictures. Investors are busy, and you need to be able to quickly explain why you make a good steward of their resources. On the most basic level, your pitch should include these three things:

1. Who you are
2. What problem you are solving
3. What you need

There aren't many founders who can walk into a pitch meeting with a reputation that precedes them, so you should include a slide with your team members and individual pedigrees. Explain the pain point you are addressing and the total addressable market. Also, don't be afraid to ask for what you need. Clearly explain what kind of capital and support you are looking for and how you are planning to use it. Ultimately, show the investors that your business is a good investment.

"Something that gives you the idea that if they're putting dollars into your business that it has the chance to grow and evolve into a meaningful business," Worley said.

Once you have secured funding and your company is moving toward becoming a "meaningful business," it is time to develop a traditional business plan.

Developing the plan

Planning is only ever helpful if it drives you to action. This is why you, as a founder, should spearhead the process. As someone who has the ability to allocate resources, you need to understand how you, and your team, see the growth of your company.

According to Josh Green, Chairman of NVCA and a general partner at Mohr Davidow Ventures, "The exercise of writing the business plan is more important than the product."

When you set out to create your business plan, keep these three things in mind:

1. Approach it as a living document
2. Set actionable steps toward your next milestone
3. Don't think too far ahead

"I think the value in that business plan document, and in keeping it alive, is that it periodically forces some of the tougher strategic questions for a business," Stavropoulos said.

Think about the goals and assumptions you made at the onset of your journey as an entrepreneur with this specific company. Maybe some of the assumptions you made earlier were correct or incorrect and, knowing what you know now, you might want to change course or adapt.

"There's still no substitute for that thoroughness and discipline in thinking on the what-ifs and all the details," Green said. "Because, you unearth both due diligence issues and risks associated with the business, but also other opportunities to see if, in fact, you're in sync with the management team about the thesis for the investment itself."

Just as a pitch will be helpful when you are seeking your initial round of funding, your evolved business plan can help you in future fundraising rounds. Entrepreneurs can raise too much capital, but setting milestones can help you avoid that pitfall. Setting milestones, and agreeing on the actions to reach those milestones, will help you set expectations and raise the proper amount of capital.

"If you don't even have the agreement on those discrete milestones, and you're just betting algebra on some spreadsheet, then who cares? You're not necessarily doing anything different than what you were doing before," Stavropoulos said.

The mark of a good business plan is one that encourages action, but is also one that is flexible enough to facilitate changes in direction if they are needed. A big part of maintaining this flexibility is not thinking too far ahead. Too many founders see the massive financial opportunity that an IPO or acquisition may bring, and they build their business toward that payday. Avoid early exit talks and, instead, focus on building a great business and getting to that next milestone.

"The reality is if you are building a great company, you are going to have great options," Stavropoulos said.

At some point, an IPO might be a milestone for your company, but it should not be one of the initial goals you set because it might muddy your ability to make decisions that are best for the business or the customers.

"The surest way not to make money is to seek it," Green said.

The time at which you should begin turning your pitch into a true business plan will be different for each company, but certain companies should consider writing their business plan early. Businesses that exist in a market where there is a lot of competition need a business plan to help differentiate their offering. Businesses in an area with many external dependencies, or one that is dependant on the market, needs to establish their contingency plan for changes in those external factors. Lastly, businesses that operate with a low-margin need a business plan to understand how quickly they can scale their business.

Conner Forrest is a Staff Writer for TechRepublic. He covers Google and startups and is passionate about the convergence of technology and culture.

Think about...Help

In recent surveys, 71% of small business leaders said they wished they had trusted outside advisors to help them address specific issues in running their companies.

In today’s difficult environment, small business leaders must make tough choices to keep their companies growing. Often, specialized expertise is needed and this kind of help is hard to find. 

Small business leaders require access to a group of independent, affordable, experienced, knowledgeable advisers with true small business leadership experience. If you face difficult decisions as your business environment undergoes significant change, 

• How do I finance growth?
• What do I do about healthcare insurance for myself and employees?
• When do I adopt technological changes needed to grow?
• Where will my new sales come from?
• Who do I build my succession planning around?
• How do I devise an exit strategy for myself and my family?
• What are the key drivers of my company in this new age of mobile marketing?
• When is the best time to purchase new products and services such as property, technology, equipment and infrastructure supplies?
• Where do I find the most competent staff for expedited growth?
• Who is best suited to manage the changing technology underlying my business?