The problem with startups is that they have such a short trajectory. As soon as they launch, it’s a race to either getting funding, getting acquired or failing miserably. Startup founders need every resource they can get their hands on to make sure they succeed. Incubators have started popping up all over the country, since Y Combinator launched in 2005. And while startup incubators can provide a much-needed injection of cash, as well as mentorship and contacts, is it really what your business needs?
Drawbacks to Incubators
1. If you work full-time, you’ll find it hard to keep up with the work. The Founder Institute requires at least 15 hours of work on the incubator each week. That’s a 3.5 hour weekly session, as well as oodles of homework. If you’re working a job (either your startup or another 9-to-5), you’ll find it difficult to balance both (we won’t even throw in family time to that equation).
2. Incubators take some of your revenue. This is pretty standard, but if you’re not prepared to share on average 6% with your incubator, it might not be for you.
If you’re a fan of Shark Tank, you’re probably like me: begging startup founders not to stumble over the valuation question. Telling Mr. Wonderful not to be so harsh on the entrepreneurs. Urging business owners to go with Mark Cuban’s offer, as he’s best suited for helping the company. It’s my equivalent of talking to the TV during sports.
Whether you talk to your TV or not, there’s a lot to be learned from Shark Tank.
1. Know Your Numbers
The single most fact that seems to turn off the sharks from a potential deal is a founder not understanding valuation. You don’t have to have an MBA to know that if you haven’t made any sales, your company is not valued at $1 million. And know that the percent you want to offer the sharks also determines your valuation. That’s why the sharks start calculating on their notepads the minute a founder mentions the amount he’s seeking and the percent he’s willing to give up.
Not so long ago, startups were happy to get funding from anywhere, regardless of the VC’s interest or connections in the industry. These days, startups are more picky about who they get capital from.
1. You’re Buying into Experience, Not Just Money
Sure, you need funds to operate and grow, but more than that, startups need connections and mentors. If you’re looking at venture capitalists, choose ones that have helped others in your field, as they’ll be more likely to be able to make the introductions you need to get your foot in the door. It’s better to get funding and knowledge than to spend your funds on learning what the right VC could teach you.
2. You Want a Cheerleader with Deep Pockets
As a startup founder, you want someone who will be honest with you about your ideas and strategies, but overall, you want someone who’s as passionate about your business as you are. Don’t find a VC who just wants his hand in your industry as an idle pasttime; find someone who wants to take apart your business to see how it works, and who can contribute positively to its growth.
Startups who are approaching the funding stage may be sweating thanks to the Dow’s recent fluctuations and the situation in Europe affecting global economies. Is it even worth your time to seek funding right now?
Keep Forging Ahead
If you’re ready for capital, don’t let the economy stop you. There don’t appear to be swift changes in the VC landscape, though it may be a bit harder to secure funding than in months past. The key is to find a venture capitalist who’s an expert in your field, and one who can get behind your idea. If he’s got the funds, no economy will stop him from investing in a good idea.
So your startup is thriving and bursting at the seams. Congrats. You’ve decided you’re ready to seek funding. While this article certainly won’t tell you everything you need to know about funding, it’ll teach you the differences between angel investors and venture capitalists. It’s up to you to decide which is right for you.
Angel Investors 101
Angel investors are private individuals looking for a strong, high growth investment. They want a better return than they’d get in a normal investment, so expect them to take 5-25% stake in your company. Funding varies, but tends to be on the smaller side.
Pros: Angels are often entrepreneurs interested in helping you get somewhere with your business. They can be great mentors as they’ve got the experience you need to succeed. If you want some advice, they’re ideal for that. And angel investors usually have great contacts, which can also be a boon for your startup. If your startup is still in the development phase (no product yet), angels may be more attracted to your business than VCs. Business deals tend to be more negotiable with angel investors.