3 Honest Ways to Raise Startup Money
Entrepreneurs tend to exaggerate. They exaggerate the success of their business when talking to startup investors. They exaggerate the market potential of their products to find distribution partners. They exaggerate the soundness of their strategy to recruit employees. Funding your business without exaggerating isn't easy, but there's a clear line between optimistic exaggeration and outright fabrication. Here are some guidelines to help you get your startup off the ground without selling your soul or spinning a web of lies.
Develop financial projections that are rooted in verifiable assumptions
Venture capital firms and angel investors typically want to see financial projections that shoot up like a hockey stick. Entrepreneurs often feel compelled to exaggerate projections to look like their businesses can reach a billion dollars of market value in a few years. There's no point in just fabricating a set of projections that aren't based on reality. One way to build a set of realistic projections is to start with business drivers that can be discussed and debated with investors. For example, if you're selling widgets that depend on the cost of oil, develop a set of financial projections that link market value to the number of widgets you plan to sell and the changing price of oil. This will show billion-dollar market value and allow investors to understand what assumptions you're basing your growth on.
Write paychecks that don't bounce, but increase as the business grows
One of the most difficult tasks for entrepreneurs is to convince talented employees to join the team and stay on the team before their company is profitable or stable. As a startup business owner, you're faced with a choice: Pay your employee a market salary (say $150,000 per year) and take a bet that you can grow the business to justify the salary, or share risk with your employee by paying a below-market salary (say, $75,000 per year) plus equity incentives (worth $75,000 or more). Most experienced entrepreneurs will tell you that it makes more sense to share risk with your employees until you have funding or until your product line gets market traction. While this makes sense, it often puts the entrepreneur in the precarious position of having to recruit employees by exaggerating how likely the prospects of venture funding are, how developed the company's strategy is, or how popular the company's products are.
Employees are usually the first to know when funding prospects dry up, strategies fail and products don't sell, so it's better to be upfront about the risks of joining a young company. But enable new recruits to share in the rewards of business success immediately rather than waiting for their equity to appreciate. For example, one clever way to share risk with your new recruits is to outline a path to increase their base salaries as the business grows. For example, offer to increase a base salary from $75,000 to $100,000 when the company hits certain milestones, then again to $150,000 when profitability is attained. Put this in writing in the offer letter. This compensation plan will cost less than promising to pay out bonuses, which get spent then forgotten, or subsequent equity grants, which get expensive for the company if they are granted many times.
Get your clients to compete to be first
Successful entrepreneurs love to tell stories about how they got their first client. While working out of a closet or a garage, they print up business cards with a prestigious address and fancy logo and close the deal. That's what it takes to sell. Exaggerating the stability or size of your enterprise to secure your first client is the stuff of legend. Even if your product isn't ready, you can use a similar approach to raise money for your business by getting investors and business partners--who can provide financial support--to compete to be first. There's a certain prestige in being part of the first group of investors, partners or customers to help launch a business. Create the feeling of exclusivity. Require an invitation to use your beta product. Generate buzz about your product plans and your team among blogs that investors read. There's less need to exaggerate if you can set expectations that your product is still being tested among early adopters.