How to Create the Next Facebook: Seeing Your Startup Through, From Idea to IPO by Tom Taulli
Authors: Tom Taulli
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broker–dealer licenses, which is an indication that they can sell securities to the public legally.
Even if you find a reputable site, I still caution that crowdfunding is not a particularly good route to take for ventures seeking early-stage funding. Interestingly enough, receiving upfront crowdfunding money could make it more difficult to obtain follow-on investment from VCs later on. Why? When you crowdfund your venture, you are giving scores of individual investors early access to your shares and, generally speaking, VCs are reluctant to jump in on a deal with baggage that includes many small investors who, collectively, can cause a litany of administrative headaches. If anything, VCs try to find ways to buy off smaller, crowdfunding investors, but even this process could prove to be too trying for them in the end. Furthermore, when you gain new investors from crowdfunding, you are required legally to provide some level of ongoing disclosure to them about your company’s progress, despite the fact that such a requirement is atypical for most private rounds of financing.
Herding Cats
It is often said that managing your angel investors is about as easy as herding cats; it is a statement that has persisted because it’s usually true. It can be tough to deal with a large number of angels. They have egos and some may be easily distracted. As a result, I recommend that you try to limit the number of angels your company signs on to no more than five. Any more than that and you may find it tough to put together a round of funding.
Free Equity
Wait a minute, free equity? It sounds crazy, huh? Why would an entrepreneur issue shares to someone who does not pay anything for them in return? This scenario actually happens quite often when an entrepreneur brings on advisors and pays them in company shares in exchange for their expertise. Advisors can certainly be incredibly valuable, as was the case with Sean Parker, who advised Zuckerberg during Facebook’s initial round of funding. Without a doubt, Parker deserved the equity he received (which, by the way, has made Parker a billionaire). However, an entrepreneur needs to be careful. There are many advisors out there who make outlandish claims about their abilitiesand may even lie about their backgrounds, so conduct some due diligence before bringing an advisor onboard. Another option is to ask a potential advisor to join your company on a trial basis to determine whether she can really deliver before you fork over your equity.
Venture Capital Funding
Venture Capitalists as Seed Investors
Some major VCs have begun participating in seed rounds of financing, which probably seems kind of strange. If a venture capital fund has $1 billion under management, how does it have the bandwidth to invest in many smaller deals? Don’t VCs have to focus on startups that need substantial rounds of financing, such as those requiring $25 million or more? Although it is true that VCs have traditionally been involved in larger investment transactions with more mature companies, some VCs have begun trying to lock in deals with ventures while they are still in their early stages of development. To this end, VCs take a “shotgun” approach to the funding process, which means investing in as many deals as possible without doing much if any research.
Obtaining early-stage venture capital funding can be an attractive proposition for many entrepreneurs. First of all, when a VC invests in a venture early on in its development, the company’s valuation tends to be higher, because the VC typically is investing only a small amount of capital and, as such, does not spend an enormous amount of time negotiating valuation figures. And, of course, when VCs are involved in early rounds of financing, a startup can potentially receive upward of $1 million in its seed round alone.
Despite these perks, receiving venture capital funding early on during your company’s development could be a bad move. Why?
Even if you find a reputable site, I still caution that crowdfunding is not a particularly good route to take for ventures seeking early-stage funding. Interestingly enough, receiving upfront crowdfunding money could make it more difficult to obtain follow-on investment from VCs later on. Why? When you crowdfund your venture, you are giving scores of individual investors early access to your shares and, generally speaking, VCs are reluctant to jump in on a deal with baggage that includes many small investors who, collectively, can cause a litany of administrative headaches. If anything, VCs try to find ways to buy off smaller, crowdfunding investors, but even this process could prove to be too trying for them in the end. Furthermore, when you gain new investors from crowdfunding, you are required legally to provide some level of ongoing disclosure to them about your company’s progress, despite the fact that such a requirement is atypical for most private rounds of financing.
Herding Cats
It is often said that managing your angel investors is about as easy as herding cats; it is a statement that has persisted because it’s usually true. It can be tough to deal with a large number of angels. They have egos and some may be easily distracted. As a result, I recommend that you try to limit the number of angels your company signs on to no more than five. Any more than that and you may find it tough to put together a round of funding.
Free Equity
Wait a minute, free equity? It sounds crazy, huh? Why would an entrepreneur issue shares to someone who does not pay anything for them in return? This scenario actually happens quite often when an entrepreneur brings on advisors and pays them in company shares in exchange for their expertise. Advisors can certainly be incredibly valuable, as was the case with Sean Parker, who advised Zuckerberg during Facebook’s initial round of funding. Without a doubt, Parker deserved the equity he received (which, by the way, has made Parker a billionaire). However, an entrepreneur needs to be careful. There are many advisors out there who make outlandish claims about their abilitiesand may even lie about their backgrounds, so conduct some due diligence before bringing an advisor onboard. Another option is to ask a potential advisor to join your company on a trial basis to determine whether she can really deliver before you fork over your equity.
Venture Capital Funding
Venture Capitalists as Seed Investors
Some major VCs have begun participating in seed rounds of financing, which probably seems kind of strange. If a venture capital fund has $1 billion under management, how does it have the bandwidth to invest in many smaller deals? Don’t VCs have to focus on startups that need substantial rounds of financing, such as those requiring $25 million or more? Although it is true that VCs have traditionally been involved in larger investment transactions with more mature companies, some VCs have begun trying to lock in deals with ventures while they are still in their early stages of development. To this end, VCs take a “shotgun” approach to the funding process, which means investing in as many deals as possible without doing much if any research.
Obtaining early-stage venture capital funding can be an attractive proposition for many entrepreneurs. First of all, when a VC invests in a venture early on in its development, the company’s valuation tends to be higher, because the VC typically is investing only a small amount of capital and, as such, does not spend an enormous amount of time negotiating valuation figures. And, of course, when VCs are involved in early rounds of financing, a startup can potentially receive upward of $1 million in its seed round alone.
Despite these perks, receiving venture capital funding early on during your company’s development could be a bad move. Why?
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