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4 Rules For Raising Money In A “Recession”
Countries may be unable to pay their debts and the global economy is still struggling, but if you read any tech news, it seems like the one place in the world where they are still dropping money from helicopters like its 2007 is technology startups. There are few things currently hotter than funding the next scrappy vowel-less app team. From incubators handing out $150k to every startup to ridiculous 100x earnings IPOs, the Spice is definitely flowing in the Valley and Alley of Silicon. It’s almost like the crisis fueled the flight to small, high growth, technology startups and to them there is no Recession or Depression.
While I live in San Francisco a third of the time and we have an office in SoMa, the other reason I put quotations around “Recession” (beyond the academic) is that 42 is headquartered in Lincoln, Nebraska. In short, Lincoln is an amazing place to run a startup for so many reasons, but it’s also one of the few places prospering in this horrible economy.
After attending Wharton and working at Morgan Stanley, I have an understanding of how the investment sausage is made, as well as personal experience having observed some pretty raw things done to entrepreneurs and emerging companies at the hands and instruments of investors.
The first time I raised funds was right before the Recession. I met Bill Kubly, a visionary entrepreneur who became my mentor and partner, and he fundamentally changed my perspective on the important characteristics of an angel investor. We closed a handshake deal quickly and painlessly with most of the month spent waiting for lawyers, and Bill has been an invaluable partner over the last few years of growth. I didn’t even know what we needed at the time and I thank Bill for being so patient and innovative during our period of experimentation.
First rule: know what you want. Do you want money, mentorship, infrastructure, independence or something else? People have very little time and there are so many wrong fits and dead ends. Each startup needs something different and you cant just copy some template when raising funds. If you don’t know exactly what you want chances are someone else will end up choosing for you. Often, entrepreneurs get caught up in micro bubbles and lose sight of what they really need to do to win. You have to be clear, concise, and visionary all at once, without apologizing for the arrogant notion that you think your version of the future is correct. If you’re not ready to live for your idea, then pack it up, go home, dust off the resume and fire up LinkedIn.
We had two very specific goals in mind while seeking out new funding and partners: (1) the relaunch of our four-year-old cash-flowing digital agency as “42” and (2) the acceleration of development of our internal software products. With these goals and the first funding experience in mind, we had very specific requirements for our next partners.
Rule number two: know who you want. Do you want a big name VC or a young angel? Are you concerned about control or is the resourcing your primary criterion? Each startup needs the right team to grow and picking the right investors is as important as anything else you will do early in your ascent. Over six months of meetings in SF, NY, and NE, I learned that the spectrum of funders is broad and diverse.
They run the gamut from angels that just want to write a check and stay uninvolved, to egomaniacs, hunting vicarious lifeblood and seeking affirmation of their wealth and power from the next generation, to smarmy fund managers with a “wine and dine” strategy, to VCs that open discussions with casual reference to required control of your company, and beyond. My advice is to be picky and wait for the right feeling as you may be spending a lot of time together.
** Side note: I was also taught a reality about early stage investing: having consistently growing revenue and a new product makes your company less “valuable” than no revenue and a new product. Not enough risk/reward without the hockey stick potential.
A friend introduced me to Mike Dunlap and Chuck Norris of Nelnet in the fall of 2011. After meeting with them a few times and going through the normal diligence process, they brought in Steve Kiene and Nebraska Global and I was blown away. Both companies defied the aforementioned spectrum and existed in the rare sweet spot of engaged investors with major resources and a core entrepreneurial attitude with a serious technical background.
Rule number three: know what’s important. During the course of any negotiation you need to prioritize what is most important to your vision for the company. With any new partners and investors you will need to protect the things your team holds most dear and decide what rights and freedoms matter the most to you and your team.
While I didn’t originally think this round would include a publicly traded conglomerate and a VC Fund, I could not have been more pleased with our immediate connection and their understanding and support of our team and vision. I thought we would get the best deal in the more competitive funding environments of SF and NY, but ultimately found the best fit right in our own backyard.
Rule number four: know when to compromise. A wise man recently told me that, “wealthy people still have deep pockets, but their arms just got a lot shorter.” Across markets, investors remain eager to invest in tech and innovation, but they are all a little tighter than one would expect. If someone is going to bet on you now, they need more than personal satisfaction to get the deal done. You don’t need to give away the farm, but make sure you’re giving enough long-term incentive to your potential partners.
At the end of any funding process you will have a new set of people and responsibilities in your company and life; make sure you’re doing this for clear reasons, with the right partners. Keep in mind that remaining firm but equitable is the only way to finish without regrets and problems down the road. Finally, take your time and try to get it right because great opportunities to do what you dream are rare.