Lesson #11 - Don't chase Money, and don't expect it either

As an active angel investor and having run an angel fund for a few years, I often am asked by entrepreneurs "How do I find investors?". Its a hard questions to answer, and even harder where I live in Florida - where venture capital is far and few between.

I have two answers - one optimistic and one a little pessimistic. But I think there needs to some levity to the answer, because raising capital is not easy, and in many cases even when you do raise capital it may be something you regret down the road. It is a classic case of "be careful of what you wish for - you may just get it".

My first answer is - a question. Before I can give you my opinion on how to raise capital - Answer the following:

Are you a scientist at a University? a successful Entrepreneur who has sold a previous venture? or a industry veteran who was a VP at a Fortune 5000 company?

If the answer is no, no and no. Then your chance for raising any institutional capital is less than 1%. If you do not live in Boston, New York or Silicon Valley - then your chance is less then .01%. I realize this is pessimistic - I am the last guy who wants to be a buzz kill for an entrepreneur - but I am trying to save the entrepreneur time and money - and convince them to focus on other paths.

The fact is - Venture Capitalists are bankers. They know the statistics, the know the variables, and they are in the business of reducing risk in their investments. One of the biggest risks in backing ventures is the founder/CEO - and if you do not fit the mold - its almost an immediate "No".

So, what is my second answer - Don't chase the money. Focus on building your business. Entrepreneurship and starting a company is not easy. If an entrepreneur is not prepared to sacrifice, invest their life savings and survive day-to-day on a string budget - then they probably should not be an entrepreneur. Many people I advise them to work for a startup that may have capital, learn the ropes and then go out on their own. Some people I talk to - are not necessarily convinced their idea is the next "billion" dollar idea - but just want to experience the life of an entrepreneur. You don't have to start the company in order to qualify as an entrepreneur. If there is a hunger for risk - there are multiple options. Join a VC -backed company looking for experienced talent - or join a larger company - and look for opportunity for spin-off opportunities.

If you are a hard-core entrepreneur, and you do believe your idea/company is the next big thing - then you need to take this advice to heart - DO NOT chase money. Focus on building your business, and the money will follow. Create value.

Don't spend your days working on a business plan, financial pro-formas based on "what if's", and building skin-deep partnerships with other companies. This is a complete waste of time. It doesn't build value - it distracts you from building a business.

Entrepreneur = Building a Business

Are business plans important - sure. Do you need one - maybe. I can tell you I have personally looked at 3,000+ business plans over the past few years - and I can't remember saying "wow, I really like this plan - I am going to invest". Realize - I am an Angel Investor and don't run a VC fund - but I don't think my thoughts are to different then that of a GP at a major firm. We all invest in companies that show traction - and have proven the model. We want to experience the business - not read about what it could be.

My thoughts apply to both Angel Capital and Venture Capital. The bottom line is - Venture Capital doesn't invest in concepts anyway - so the only hope for a startup to raise capital is through Angels.

So the obvious follow-up question is "what about Angels? or Friends/Family". Yes. you can raise money with a business plan. There are a lot if angel investors who will write checks - just because they like the idea and like your enthusiasm. But I think this is a dangerous process - for both you and the investor. First of all, you should always consider your investors money as if you were making the investment yourself. Second, you owe it to the investor and yourself to take the venture as far as you can until you are convinced your business will use the capital wisely and to grow - and not to "prove out some ideas".

To summarize - focus on your business. If you have something special it will attract attention, momentum and eventually money. Investment should not be in your business plan. If you want to write a business plan that makes an investor say "wow, I like this business plan" - it should show how you have grown the business with little or no capital, show consistent revenue and a financial plan that shows a valuable company in 12-24 months with no outside capital required.

Then, they will want to invest.