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MenuWhat's harder, creating the opportunity or financing it?
I successfully pitched two major players on a game deal with an established team and a proven sales record. Half of it is financed, and I'm looking for the other half. Everyone I talk to says what I've done is the hard part and financing the rest is the easy part. I have not found the money and I risk losing the deal. I can't crowdfund because the players in this deal don't want to risk credibility. What don't I know, but should?
Answers
Personally, I have always found harder to finance and than creating opportunity.
It is quite "easy" (once you have the right value proposition and target customers) to sell but getting paid is way more difficult. Most small business are dying not because they are not selling, but because they are not getting paid early for their work and finally lacking liquidity for their operations.
So funding is a bit like getting paid in advance.
What we usually do is split the total bill in bits to be paid out gradually based on progress and well defined target.
I have seen your situation before with other customers. What they did was to start developing the product with the budget they had focusing on the most interesting part and then they went with this half finished but functional product to pitch investors. And this how they got the missing part of the funding.
You need to target seed stage investors who like to "follow." Your current investors act as validation for your idea and deal. Investment is a game of knocking on the right doors versus sales, which is just knocking on a lot of doors. Ask around your network for investors that have done similar deals in the past to what you are proposing. Connect with them and gauge their interest and what they'd be able to bring to the table. Keep up meetings and provide updates, getting them excited about what you're up to. Presenting at a game-centric Angel Forum is another avenue.
You literally have done the "hard" part, you have a lead investor. You've made it where 99% of venture-backed businesses don't. However, getting people to part with large sums of money still takes time, they need to trust you will do well with it. Keep talking to seed stage investors who have funded ideas like yours and you'll get there.
I'm a believer in shoestring start-ups so I would be creating a situation that would have investors seeking me out. You need to get yourself out there in front of as many people as possible bragging about your great new product so that investors call you. Let me say this an investor who called you is worth at least 10 times one you phoned. One your in charge and your looking for the best investors, the other your one of a hundred people calling them and they are looking for the best investment, which position do you want to be in. How do you have them clamoring to your door is get some minimal, viable version of your product or service so you can show some real figures, real buyers not just a hypothetical possibility of success. Call me for more on this, thanks....Ken Queen
Financing is the hard part, not the easy part. You need to get yourself out there in front of as many people as possible bragging about your great new product so that investors call you. One you’re in charge and you’re looking for the best investors, the other you’re one of a hundred people calling them, and they are looking for the best investment, which position do you want to be in.
You can read more here: https://www.uschamber.com/co/run/business-financing/business-financing-challenges
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath
Related Questions
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When raising money how much of equity do you give up to keep control? Is it more important to control the board or majority of shares?
It entirely depends on the kind of business you have. If you have a tech startup for example, there are pretty reliable assumptions about each round of funding. And a business plan and financial forecasts are almost totally irrelevant to sophisticated tech investors in the early stages of a company's life. Recent financial history is important if the company is already generating revenue and in that case, a twelve-month projection is also meaningful, but pre-revenue, financial forecasts in tech startups mean nothing. You shouldn't give up more than 10-15% for your first $100,000 and from that point forward, you should budget between 10-20% dilution per each round of subsequent dilution. In a tech startup, you should be more nervous about dilution than control. The reality of it is that until at least a meaningful amount of traction is reached, no one is likely to care about taking control of the venture. If the founding team screws-up, it's likely that there will be very little energy from anyone else in trying to take-over and fix those problems. Kevin is correct in that the board is elected by shareholders but, a board exerts a lot of influence on a company as time goes-on. So board seats shouldn't be given lightly. A single bad or ineffective board member can wreak havoc on a company, especially in the early stages of a company's life. In companies outside of tech, you're likely going to be dealing with valuations that are far lower, thus likely to be impacted with greater dilution and also potentially far more restrictive and onerous investment terms. If your company is a tech company, I'm happy to talk to you about the financing process. I am a startup entrepreneur who has recently raised angel and VC capital and was also formerly a VC as part of a $500,000,000 investment fund investing in every stage of tech and education companies.Tom WilliamsTW
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What is the average cost to close a round of seed funding?
I'm reluctant to say "it depends," but legal expense for a true seed round varies dramatically based on: 1. Whether the investment is structured as a priced equity round vs. convertible debt (or variations on that theme such as "SAFE") 2. Number and location of investors, timing of closing(s), and prior angel investing experience 3. Company counsel's efficiency and fluency in industry norms 4. "Deferred maintenance" necessary in areas like corporate formation, founders' equity issuance and IP assignments. #4 is the item that takes many entrepreneurs by surprise. On the investor side, it leads otherwise very savvy observers to give unrealistically low estimates of legal expense because they assume starting from a clean slate. This item is also most resistant to automation or standardization because startups come into being many different ways; each story is unique. I would put the lowest estimate at around $3K, assuming the company is already formed as a Delaware corporation with clean, basic documents, has issued founders' stock and handled related IP and other matters, and simply needs to issue a convertible note to one or two accredited investors with minimal negotiation of documents. The highest I would expect for a true "seed round" is about $15K, where some corporate cleanup is needed, the deal is structured as a streamlined kind of preferred equity (e.g., Series Seed), there are multiple closings with investors on different dates and terms, etc. Beyond that point we're really in "Series A" territory, doing things like creating a full set of VC preferred stock investment documents (about 100 pages), negotiating with investors' counsel (at the company's expense), and so forth. The expense and complexity of a traditional Series A deal have been the main impetus behind using convertible debt or Series Seed-type documents for seed-stage investments of less than $1 million or so in recent years. I hope this proves helpful. Always happy to chat and answer further questions.Antone JohnsonAJ
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What happens to a convertible note if the company fails?
Convertible notes are by no means "earned." They are often easier to raise for early-stage companies who don't want to or can't raise an equity round. Equity rounds almost always require a simultaneous close of either the whole round or a defined "first close" representing a significant share of the raised amount. Where there are many participants in the round comprised mostly of small seed funds and/or angel investors, shepherding everyone to a closing date can be very difficult. If a company raises money on a note and the company fails, the investors are creditors, getting money back prior to any shareholder and any creditor that doesn't have security or statutory preference. In almost every case, convertible note holders in these situations would be lucky to get pennies back on the dollar. It would be highly unusual of / unheard of for a convertible note to come with personal guarantees. Happy to talk to you about the particulars of your situation and explain more to you based on what you're wanting to know.Tom WilliamsTW
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What roles should the CEO and CTO have in a VC meeting?
The more important first impressions to leave a VC with are: 1) That you both are credible and inspire confidence that you can execute the plan you're fundraising on. 2) That there is good chemistry and a great relationship between the two of you; 3) That you can adequately address the concerns/objections/questions the VC raises. The CEO is expected to do most of the talking because the CEO should be the best person in the company at articulating the vision and value of the product and company you're building. If your CTO is comfortable presenting part of the pitch, it would be ideal for the CTO to speak to the product slides. The most important thing is for the CTO not to be a "bump on the log" meaning that you don't want them sitting there for most of the presentation with nothing to say. If you feel that's the case, you really shouldn't bring your CTO. Most VC meetings will not get technical and under the hood. Each question answered should be answered by the person best qualified to speak to that question. You should make eye-contact with your partner and use subtle body language to find a way to cue the other person to speak to that question or simply offer "CTO, would you like to answer that?" Bottom line, make sure that the CTO can speak confidently enough about the product and vision, otherwise -unless specifically asked by the VC - come alone. Fundraising is a big distraction to building and a good VC will always respect that in a first meeting, the CTO can be excused from attending in priority of building product. Happy to talk to you both on a call about helping get you feeling a bit more confident and prepared before your meeting. I was formerly a VC associate for a $500m fund and have raised money from VCs as a serial entrepreneur.Tom WilliamsTW
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How important is a co-founder when it comes to raising capital?
I'm a single founder who was raised angel and venture capital. If your business is compelling enough, you could raise angel funding. But there is little chance you can raise venture funding without a team in-place. It's a negative signal to institutional investors that you haven't been able to lock down a committed team. That said, depending on the nature of your product and traction, it sounds like you might be past the stage of recruiting a cofounder and more into hiring a great team of employees. The differentiation being less title and more the amount of equity. It sounds like you are selling a physical product so the question is whether you have built the capacity to scale. If not, the importance of having someone on your team who has done that at scale, even at the angel level of funding, could be helpful if not required. Happy to do a quick call and give you more contextual advice.Tom WilliamsTW
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