Some of the myths about raising money in a startup are all too familiar. “I just need to be introduced to the right person.” “I will put my idea on one of those crowdfunding platforms.” “Once my prototype is done, everyone will want to fund me.” Or, my favorite, “We will bootstrap with [students/interns/work for stock] people.” Raising money for your startup is not the result of some elusive magical incarnation. It’s a step-by-step methodical process, just like any other business activity. Raising money is not complex, but it is a lot of work. Maybe that is why so many people cling to the myths.

1. By Steve Owens
Finish Line Product Development Services
A Better Way for Small Companies to Develop Products
The Three Funding Phases of a Startup

2. Some of the myths about raising money in a startup are all too
familiar. “I just need to be introduced to the right person.” “I will
put my idea on one of those crowdfunding platforms.” “Once my
prototype is done, everyone will want to fund me.”
…..Or, my favorite, “We will bootstrap with
[students/interns/work for stock] people.”

3. Raising money for your startup is not the result of some elusive
magical incarnation. It’s a step-by-step methodical process, just
like any other business activity.
Raising money is not complex, but it is a lot of work. Maybe that
is why so many people cling to the myths.

4. • The Three Funding Phases – Most startups go through three
distinct funding phases:
• 3Fs (Friends, Family and Fools)
• Seed, or Angel
• Venture Capitalist (VC)
• There are funding rounds beyond VC, but for our purposes, a
startup is not a company that just raised tens of million of
dollars.

5. Each phase has its own strategy, with a specific mission and
method. The key is to accomplish those tasks that will qualify your
startup for the next funding level and not get distracted with tasks
related to the next round. The method is very similar to marketing
and selling anything–fundraising is a marketing and sales activity.
People raise money at every stage of the startup. It is true that a VC
will not invest in your company unless you have a proven,
repeatable business process, but Angel investors might invest
before this stage.

6. It is a myth that there is a funding gap. There are, however,
entrepreneurs who will never raise any money, and the funding
gap is one of the excuses they use to make themselves feel
better.

7. The 3 Fs:
In the beginning you have nothing but an idea and ideas have no
monetary value unless they are acted on (execution).
Yes, maybe the idea will one day become a successful company,
but that does not mean you will be the person who started that
company. In all likelihood, several other people have the same
idea. If they don’t, then your idea might not be viable.
Your original idea will likely evolve, and many other important
ideas will be added to it before it gains real value.

8. Thinking an idea is worth money is one of those terminal mistakes
a startup can make. In the beginning, when you just have an idea,
but no evidence of your ability to execute, the only investors
you’re going to close will be friends, families, and fools. Friends
will write a check because they feel obligated.
Family will write a check because love is blind. Fools will write a
check because they are ill-informed.

9. Most 3Fs will write very small checks, which is a good thing
for them. Fortunately, at the 3Fs stage you do not need much
money. Typical 3Fs funding is less than $100K, and
sometimes zero.
Your mission in the 3Fs phase is Market Validation. You need to
provide empirical evidence that you can turn your idea into
repeatable business system. For more info on how to do this, read
our white paper: (How to Raise Money for Your Startup).

10. Seed Round: Once all the checks clear from the 3Fs and you
have used this money to validate the market, you’re ready to
start working on the seed round..
Typical seed rounds are $500K to $2M. Generally, several Angel
investors will write checks for “smallish” amounts ($50K)
Sometimes they are syndicated in some way, like an Angel
group or private family office.
Sometimes seed money comes from strategic relationships–
companies that stand to gain significantly if you’re successful.

11. Your mission in the 3Fs round is Market Validation. You need to
convince an Angel investor:
• You are solving a problem people will pay money to solve.
• What they are willing to pay is enough for you to make a profit.
• You have the ability to create and execute a business system that
generates repeatable revenue.
• You will be able to spend $1 on Sales and Marketing and
generate $10+ dollars in revenue

12. • You can develop the product for some reasonable amount of
money.
• You can make the unit for $X and sell it for significantly more.
• You can raise a VC round.
VC Funding: Once we have closed on the Seed round, our
mission is to build a prototype business that generates a
repeatable profit, or would generate a profit if scaled. A VC
invests in companies that, if scaled, will grow rapidly for an
extended period of time and make a profit.

13. They are not interested in theoretical businesses; they want to
see proven businesses with customers and profits. They need to
see:
1. Satisfied customers
2. High margins (or if not, would be if it were scaled)
3. Repeatable Sales and Marketing processes
4. A repeatable, well-controlled operational process (how you
serve the customer)
5. Ability to scale to a large business
Getting to this point is the hard part, but if you create such a
business, finding a VC will be much easier.

14. Once you start getting traction (growing revenues, satisfied
customers, fewer fires each day), you are ready for a VC round,
assuming you need VC money.
This part is not very complicated. If you have done your job
correctly, VC have already found you. If they have not found you,
it is easy to get their attention.
First, do research to determine which VCs will invest in your
space (don’t waste your valuable time if they do not). If you
really have traction, they will meet with you.

15. Get at least two VC, and try to get them to compete for you.
Sometimes they will “co-invest,” which means they are trying to
limit competition. That might not be the best way to get the best
price for your equity.
Finally, remember that you will need a good lawyer, one who
specializes in startups and knows how to negotiate term sheets
outlining the deal terms.
Steve Owens
www.finishlinepds.com

16. Thank you!