I will confess that I extract tremendous pleasure, or at least tremendous therapeutic value, from these articles. I am secretly hoping that someone will also learn things from my vicious ranty rambling.
The period of time when I was successfully making money running my own boot-strapped game studio is bittersweet to me. Looking back, it is the time that I thought that I knew the most about everything that mattered. In truth it was probably a time that I knew the least relative to my role as a business founder. That disconnect certainly did not stop me from trying to do crazy things. Among those crazy things, trying to raise money as an engineer-turned-founder was probably the craziest. I at least feel some shame for the times I went around to various people with my hand out to try to raise money without really understanding what I was asking.
Now that I am a little older and a lot more wiser, I read through the 20ish versions of my edited pitch decks and I tear up a little at my naïveté as I peer into the shape of my own inner tree rings.
The truth of it is that I really did not understand fund-raising at all.
This was my biggest personal failure as a first-time engineer-turned-founder. I have told this story more than once in the past six months. That alone tells me that this subject is worth adding to my weekly brain-sprayings. So here we go.
The last thing you should try to do when you need money to build something is to go and raise money from investors. I honestly wish someone had told me this. Maybe they did. I was so fixated on wanting to build big things and had seen so many press releases about people raising money I honestly assumed that there was nothing to it. Right? If some bunch of people are willing to invest six million dollars into all these other clearly bad ideas, they must be willing to put six million dollars into my bright ideas. After all, ideas plus engineers equals profit. All you need to do is add enough runway.
It turns out that is not the case. While there are a small number of investors who will write a check for a napkin pitch, generally the people who they give that money to are safe bets. They are people who exited before, or they worked with said investor in a previous company, or in general have a compelling track record. You kinda have to stare at it squinty-eyed sometimes to see the connections. I assure you those super-secret connections are there. If you don’t have those super-secret connections or you have not already established a compelling track record then I have some unfortunate news: You are probably too risky to get funded.
One of the nice things about being in silicon valley is that you get exposed to a lot of successful entrepreneurs. One of the things I have observed is that this class of entrepreneur is always pitching; they are refining their ideas and constantly looking for feedback and ways to improve their story. In hindsight I should have realized all the ways that their pitches talked about how they reduced risk, or what they did to make it sound like they did not need the investment. Raising institutional capital is as much a science as it is a craft. I wish I would have been dissecting those rehearsal pitches with more rigor over a decade ago.
So what can you do as a first-time entrepreneur and you do not have that track record, nor do you have those super-secret connections?
You have to eat your risk.
There are a number of things you can do to get rid of your risk, depending on your skill set. I tended to go for the most painful one: Bootstrapping.Spending half of your time building out a service business and the other half of your time building out your big idea is one way to get to a point where you have stood something up, but because you are splitting your focus it is a pretty tough road; nothing moves forward fast enough, and managing expectations is hard.
Another way you can eat the risk is to find an early customer. Someone may be suffering an acute pain that you are looking to remedy. That pain may be so substantive they cannot wait for you to get to market.
A third way is to find angel investors who get in early looking for a slice of the pie for when your business goes great. This is probably my least favorite of these but in the long term it might be the easiest. I have spoken with quite a few people who have gone down this road and I have noticed from my fundraising experience at startups that you can spend just as much time and energy raising fifty thousand as you can for five million. Also, the amount of equity you will need to put up for that initial raise may be very expensive downstream. This probably takes the most risk out of your life, but also, it comes at a steep cost in equity.
So there are three things you will need to balance carefully as a first time founder. Do you raise money? Do you bootstrap? Do you pre-sell your product? Each of these has its own costs, and each of these has its own benefits. Figuring out how to get your product stood up will take money. Where that money comes from is largely going to be up to you.
The more you can do to get your product built and in front of customers, the less risky of a proposition it will be for an investor. The less risky of a proposition it will be for an investor, the more likely that they will write you a check.
It took me five years of doing this incorrectly to figure that out; I still feel kinda dumb about it. I hope you learn this quicker.
Thanks again for joining me on my weekly writing trip. I hope that this is habit-forming for you. Give me all the stars, recommend me to a friend, enjoy this more than Cats.
I look forward to more awkward thinky-sharing next week!
