Where Should Your Startup Funding Come From?

"It is easier for an entrepreneur to win a lottery than it is to get startup capital from a VC."

--Bill Bygrave,Babson College, at the National Association of Seed and Venture Funds.

Bygrave is Frederic C. Hamilton Professor for Free Enterprise at Babson College. He is a principal researcher for the 2002 Global Entrepreneurship Monitor (GEM) and director of the Babson-Kauffman Entrepreneurship Research Conference.  So he should know. 

When asked if there were VCs in the audience, one (John Nice, Venture Investors) raised his hand.  "You're irrelevant, Bygrave told him.  You can go now."

The point of this comment, of course, is the funding gap that exists between the need for startup capital and the ever increasing trend of investors of most stripes - and virtually all venture capitalists - to move upstream to larger investments in later stage companies.

Most startup funding - and almost every startup by definition spends money on something that it did not earn in the anticipated business - comes from friends, founders, and family (and some would add "fools" to the list!)  That's most as in 99% +. 

So where should your startup money come from? 

Where you get it - from whom - is vastly more important than the terms.  Savvy investors can help a company grow - dramatically.  Unsophisticated ones not only become a drag in some cases, but almost always lose faith over time and become impediments to future financing. 

Consider what happens when your otherwise good venture cannot get reinvestment from original investors.  New potential investors worry about why.  Or, worse, if the early guys want to sell to the later guys, that really makes the new buyers nervous. 

From whom you get startup funds is always more important than the terms.

Comments

[Roman Rytov]

How about corporate sartups? I mean if you work for a big company what about asking money from it? How does it different from the typical way of bootstapping? Tried to ask right questions here: http://roman-rytov.typepad.com/miles/2006/10/corporate_start.html

[tim keane]

Roman, this is a great question. I don't have much experience with corporate venturing. I suspect the issues may be more along the lines of negotiating important milestones and phased funding and resources. Corporations have a tendency to want to make a yes/no funding decision instead of investing in an idea and adding funding as milestones are met. That sometimes means that good ideas don't get intermediate funding when they should.