Welcome back to another episode with Andrew Romans. In the last episode, we defined venture capital (VC), angel investing, and private equity, and we discussed three ways to de-risk venture capital, and how entrepreneurs can leverage technology. In today’s episode, we’ll discuss how to raise capital for your business.
How to Start Raising Capital
Here are a few of Andrew’s ideas on how to start raising capital for a business.
Build the Team First
When Andrew founded Global Telecom, he recognized that he was young and didn’t have a lot of experience, so he decided to build a great team. He recruited the former CFO of AT&T and other top professionals in different fields and signed employment agreements with them contingent upon $5 million of funding. Then he was able to go into the VCs and say, “It’s not just me, here’s the team.”
Andrew said, “Go out and recruit people. If you can recruit really top people in this talent war where they have so many choices, that says something to investors.”
When investors can see that we have an excellent team, they will want to back us. We can recruit people saying, “Here’s your deal contingent on my ability to fund you.”
Go to Lawyers
One way to start raising capital is to go to the lawyers that do VC funding deals. These lawyers know a lot of people, and they won’t charge us until we raise some money. They’ll help us raise that money by making introductions for us.
Create a Board of Advisors
Something else we can do is take about 5% of the company and create a pool for advisors. We can build a board of advisors by finding the richest person we know or getting introduced to someone who’s interested in the company. We can give them free equity in the business, and in turn, they can cut a check themselves or introduce us to wealthy people who can pull together some money for the company. Then we’ll have some angel investors to help us get the company going.
Invest in People
Andrew said, “One of the secret ingredients to success in this monetization is just the entrepreneur. Bet the jockey, not the horse. If you’re investing [at an] early stage, a lot of these companies will pivot, and . . . what you’re left with is the market that you’ve invested in, some core technology, and the management. In a world of pivots, it’s the management that you’re going to have to stick with.”
When we invest, we need to invest in the people, not just the products or services they offer. Products and services will change. We need people who are going to be able to pivot and manage whatever changes come.
When we invest in people, it means more than just giving them money. We need to be there to support them in the good times and the bad.
“Work hard but be kind to people. Do a lot of favors to get a lot of good karma. . . . I think [spending] 30% of your time helping other founders and other people . . . [will] come back to help you,” Andrew said.
“If you back the founders and they fail, and you are good to them throughout, . . . helping them get up and running and somewhere else, they’ll come back and let you invest in their next deal where they learn from the first failure. Or they’ll just do something to help you,” Andrew continued. “I think supporting people through good and bad days is important.”
Raising Money is a Process
Some entrepreneurs at the beginning think, “Alright, one investor gave me the money. I gave them half the company. That’s done.” However, as Andrew said, “Raising money is a process.”
Most of the time what happens is the company raises some money and grows a little bit. Then they raise more money, and they grow more, and the cycle continues. We need to make sure that with each round of raising capital we are growing our company, building a steady base of smaller clients, and reaching for bigger clients as we go.
As we raise capital, it is a good idea to talk to people who have gone through the process before. They will be able to walk us through it step by step and make sure we don’t make any mistakes along the way.
Why is now a good time to start a business?
Now is a great time to start a business because so many things are much easier than they used to be. We don’t have to be in Silicon Valley; we can be anywhere in the world. It’s easier to build a website, and it doesn’t cost as much as it used to.
It’s also easier for anyone to be an entrepreneur. Our culture is much more accepting of people from all different kinds of backgrounds. It’s also easier to get funding at every stage. Now is a great time to start a business.
How to Position Ourselves for Mergers and Acquisitions
At the end of the day, many things in business come down to people, and this subject is no exception. If we’re preparing our company for mergers and acquisitions (M&A), we need to surround the company with good people and foster our connections.
Andrew said, “It’s good to . . . have a lot of network support around the company. The most important decision you’ll ever make as a founder is recruiting your co-founders or the first people you recruit to join you and that company. That’s probably the biggest decision. . . . Getting a diverse set of people around the company to support it is going to lead to good M&A.”
With these connections, we can figure out what’s going to be a good decision for the company. They are able to help us get good M&A and support us through the process. We do need to be careful that, in the process of M&A, we don’t let it take up all of our time and let the company’s sales drop. That could lead to getting a deal that isn’t as good as we hoped for.
Find the Magic Button
Niklas Zennström and Janus Friis founded Skype and Kazaa, a peer-to-peer file sharing application. At the time, people were stealing music on Kazaa, so they put a button on Kazaa that said, “Hey, you don’t pay for this stuff. Why pay for telecom?”
“That one button was the secret,” Andrew said. “What is your button on Kazaa that you can manifest or come up with to separate you from everybody else? Skype was no different than anybody else.”
People often think of Myspace as a failure compared to Facebook, but six months after it was created, Myspace was bought for $580 million. How did they do that?
They told music bands, “If you make your own website (which was a challenge) and you become a big hit and get a million downloads, you’re going to have to pay a lot of bandwidth. It could bankrupt you because you’re not monetizing your music yet, but you can upload your songs to Myspace on your Myspace profile and let your audience listen to them there.”
Even small bands had people in their email list and they were constantly adding more. So they would generate content, upload it to Myspace, and then send it out to their mailing list. Meanwhile, Myspace was just sitting there while these bands uploaded user generated content and marketed it to their email list. They figured out how to segment the market of music bands who were trying to chase their dream, and they provided a service that worked in a very viral way.
Andrew said, “If your only game plan is, ‘I’m going to raise money, or spend my money, and put ads on Facebook and YouTube,’ that’s not impressing anybody. At a minimum, figure out where your users are on the internet, and then go on 14 websites and treat it like portfolio management: you drop your bottom three, you add another two. The internet’s changing; your users are moving from Facebook to Instagram. Just do something. You can’t just say, ‘I’m going to buy my users.’”
Thank you so much Andrew for sharing your stories and insights with us today. Here are some of my key takeaways from this episode:
- When investors can see that we have an excellent team, it will likely increase the chance of them investing.
- Lawyers know a lot of people and may be able to introduce us to people who can help fund us.
- We can take about 5% of the company and create a pool for advisors.
- When we invest, we need to invest in the people, not just the products or services they offer. We need people who are going to be able to pivot and manage whatever changes come.
- Raising money is a process. We need to make sure that with each round of raising capital we are growing our company, building a steady base of clients, and reaching for bigger clients as we go.
- It is easier and cheaper than ever to build a business.
- If we’re preparing our company for mergers and acquisitions, we need to surround the company with good people and foster our connections.
- We need to find our magic button that can separate us from everybody else.
Connect with Andrew
To learn more about or connect with Andrew:
- Connect on LinkedIn, Twitter, or Facebook
- Email him at email@example.com
- Visit his website at 7bc.vc
- Check out his books on Amazon