Startups and angels: Along the way to success

What's Your Alternative?

There's a comment here from an earlier note that asks "...at what point does an innovative idea or product become worthy of an investment?"

I would ask you to consider another question: "What's the alternative to a third-party (i.e., not friends and family) investment for my startup?

I asked an entrepreneur this question the other day.  He was looking for several hundred thousand dollars essentially to go and try an internet idea.  After a short discussion, I think he generated some great insights about ways to get to the same place on little or no outside investment.

There's always another way. 

In my case, in the first company, it was early customer selling that provided the startup cash. 

Most companies start without investors and never have them.  That's not because there isn't enough money; it is because the companies don't need or are not appropriate for funding by high-expectation, high-risk investors.

These companies find capital primarily by finding customers and understanding trade-offs.  They get a purchase order, open for business, begin working on projects to generate cash, or in a thousand other ways.  

Their alternative is not to keep looking for investment for years, but rather to find ways to create a real alternative. 

Sometimes that early growth capital is precedent to a big investment.  (Not often, but sometimes.)  An example of that is pre-revenue science start-ups with grant funding.  Other times, early success and acceptance allows a company to look for growth capital on much more favorable terms had they not had the early success.  (Remember Vermeer?  Look it up.) 

Other times, early success means keeping the equity "in the family" of entrepreneur and colleagues.

For those who don't figure it out some people just keep looking.  After some period of time, absent any change in the company's results, those in the know have heard the story so often that they ignore it.

If you like snipe hunts, join the boy scouts

Many of us who've been in the boy scouts (and other organizations at the same age) may remember the age old tradition of older, wiser scouts sending the younger, inexperienced ones on some version of a "snipe hunt."  You - the younger, inexperienced member - spend the evening being directed from place to place in search of the elusive snipe.  It, you are told, is just around the corner, or was "just here," and if you hurry, you can catch it.

Of course, in the end, it's a big joke. 

A lot like the experience first-time entrepreneurs have with so-called "investors."

"Oh, I don't invest in xyz, but so-and-so sure will be interested."  And on it goes. Because the reality is that no investor of any sophistication is going to be interested in the startup as configured.  Doesn't mean that it's DOA, but that it has major flaws.

Instead of accepting some responsibility to provide an honest critique, they engage in a snipe hunt and think it's an easy way of avoiding a further discussion.

Perhaps it's not always solely the fault of the investor.  It's amazing how many people I talk to about start-up ideas can't get past the "sell all the time" mode.  It is pretty tiring and doesn't make me want to be very helpful. 

On the other hand, if I stop and consider the impact it's possible to have, I will (usually) attempt to be of some help on the subject of "why not." 

Most of the time, "why not" is too inexperienced, not knowledgeable about investor expectations, doesn't understand deal structures or finance, hasn't gotten a handle on customer reaction, or is just too early.  Sometimes people have been badly counseled by attorneys to try and sell non-standard structures.  Imagine.

The "what now" part is harder.  Like so many things in this category, it depends.  If you have had experience in doing a start-up, (or, second best have access to someone who has) you can probably determine whether you are on a snipe hunt or a legitimate search for the right fit for your company.

In many cases, if you are in the latter situation, you will find you are spending a lot of time understanding what type and stage of companies your target investor is in, what kind of experience they have, and who they know.  If, on the other hand, you are talking to whomever will listen, and nothing seems to be going very well, get out your snipe catcher.