Tuesday, September 11, 2007


You are thinking of starting a video game company, or a restaurant, or maybe a comic book store. It doesn't matter honestly. You are going to need money. Where do you get it?

First go to google and read up on how to approach investment groups. There are some good coaching articles out there, and there are even some good professional places that will give you a weekend class on how to talk to investors. Then you will be ready to go out and talk to them for real.

Remember that most investors already know you are just an entrepreneur, they don't expect you to be a big money roller because then why are you talking to them?

So you need that startup money. I usually tell people that its easier to sell something that partly done, or all done, than to sell them vaporware. This is usually true. If you can keep your day job and get the foundation of your new gig well laid before actually start drawing on your startup cash you will be better off.

Common sense? Probably. Did I make this mistake? Yup. I learned not to do this again though. While the benefit was great, I could dedicate all my time to getting us up and running, that time spent could have kept another month worth of money in my bank account and would only have delayed my time to market by like a month. A month wont kill ya.

I would like to stress two things for you to consider, and I think they are pretty important.

1. Go to friends and family (or your own reserves) for your startup cash before you try to seek outside funding.

2. Do not screw around with equity / stock. It's a trap, it's filled with paperwork, just don't go there.

Its going to be a lot easier to try and get your friends and family to give you some money for your business idea. The best part is that it will give you practice trying to sell a good idea to people, and if you totally screw up your presentation they are more likely to forgive you since they are relatives. Then there is the other side of screwing up: your business fails. Your friends and family are once again more likely to forgive you for losing their money than a stranger is. Sure your mom may get mad, your friends might not call you to go to the pub with them, but they probably aren't going to sue you like a stranger would.

Okay now for number two, do not bother with stock. When you first create your company you can create a corporation. If you are taking other people's money you will probably want to do that, but you might want to so sole proprietor instead. It really depends on how you forsee yourself raising money, and how you want to be taxed on everything you do.

Talk to a small business attorney and find out the pros and cons of each one.

If you create a corporation you have to issue stock (I think) and I would recommend creating something like a million shares. It's easier for the future. Now, just give yourself 100. You are now the sole owner of stock, and own 100% of the issued shares, so you are the boss. You can also write off the business' losses and do other crazy tax things. Laws vary by the state in which you incorporated.

DO NOT give out shares of your company to the friends and family that invest in you. They want something in return for the money they are giving you? Fine make a contract with them that says you will pay them back their money within the first year (or 2, or 4) that your venture is profitable and that their money to you is a loan, interest free. Now, that takes care of paying them back, but what else? They probably want to make more than they paid because that's the whole point in investing. So add on something like "You also get a percentage of any profits that the board of directors decides to pay out to the investors."

That way you are selling them the promise of future money, but you are avoiding the sick mountain of paperwork that selling them securities (stock) requires.

If you do this, you might want to think about acquisition or how it will affect your investors in the future. If you have a pile of loans that need to be repaid is anybody going to want to buy your little company? Probably not, nobody is in the business of buying debt. So take your friends and family money and make it last long enough to get your product made, and launched, and in to the "it's making money but I need that push to really take off."

Now you are more attractive to an investor. You have a real product, you have a market share, and you have some revenue. Your loans become less off putting now.

Thats my advice so far. I learned this by doing it, and by shopping Skill City around to various interested parties. Hopefully you will find your experience easier now, having read this.

Oh and read this: http://blog.pmarca.com/

1 comment:

Philippe said...

Nice article! Thanks for the info and advices