Entrepreneur Myths (24 page)

Based on my experience of having raised tens of millions of dollars on various ventures, I learned it’s actually easier to raise the larger amount of cash. The hardest money to raise is seed money between $20 thousand and $500 thousand, unless you’re accepted by companies like Y Combinator, or Tech Stars. You can’t even imagine the hell I went through as a young entrepreneur trying to get an investment of a measly 20 fucking thousand dollars.

I have talked with thousands of entrepreneurs and most of them say that raising small money is really, really hard. I can proudly say I’ve done both. I will never raise small amounts of money again. It’s too much of a hassle and it takes the same amount of time as raising big money.

Raising small money over the last few years has become a little easier thanks to angel organizations such as Keiretsu Forum (keiretsuforum.com) or accelerators such as Y Combinator (ycombinator.com) — but it’s still not that easy. You still have to convince these organizations to even look at your deal.

Follow my logic on big money vs. small money. If you’re talking to an investor with substantial resources, and they have the power to deploy millions of dollars, I highly suggest you don’t ask them for $20 thousand to $50 thousand. You might get thrown out of their office.

From an investor’s perspective, it takes almost as much time for them to conduct due diligence on a $100 thousand investment as it does on a million dollar investment. This is one reason why venture capital doesn’t often invest into seed stages, and angel organizations like Keiretsu Forum fulfill that investment void. Traditional VCs don’t want to spend the time and money to look at a $50 thousand to $100 thousand deal. It’s not worth it for them. Besides, they would rather let angel investors weed out the good deals from bad in the startup cycle of the venture process.

If you’re looking for seed money, you can finance it yourself through (1) your savings and credit cards (not advisable), (2) family and friends (be extremely careful), (3) business associates, (4) customers and suppliers, or (5) angel organizations.

You have to know and gauge the investor you’re pitching for money. If you’re pitching a billionaire, don’t ask them for a measly $10 grand. And you don’t want to go to a VC firm and ask them for hundred grand — unless they fund seed stages, which is not as often as you think.

For seed money, if you don’t have it yourself, you have to go to your friends and family (FAF). That’s a lot harder than you think. Plus, if the venture fails, you might be asked by your FAF to pay back the money, even if it was an equity investment. You might feel responsible and have to pay them back, just to keep up the relationship or avoid a family war. One more word of caution, as weird as it may sound: if the venture succeeds, then your friend or family member might act as if they were the sole reason for your success and you owe them for eternity. I guess at that point of success, who cares? But I’ve seen it happen.

On the other hand, if you want to lose some of your FAF quickly, just ask them to invest into your venture. Things can get
really
awkward if they turn you down. Asking friends for money should not be based on friendship. I’m not saying you shouldn’t ask your friends for money, but you must give them the reality of investing into startups. There should be no strings attached and no pressure to invest — easier said than done. We all have friends who we could never ask to invest. It’s just not worth the headache should something go wrong with the venture.

Sheep or sleep

Here’s a great test for any type of investor, whether it’s angel, friends, family, etc. I call it the “sheep or sleep” question. This one question has become a classic for me over the years, and fun too. I simply ask, “What is the amount of money you can invest without losing any sheep or sleep?” What I mean is that you don’t want to get money from an investor who freaks out about investing, and then starts counting sheep every night while tossing and turning, turning and tossing — losing sleep.

The magic
“sheep or sleep” question is the most important question you can ask any investor. I don’t give a fuck whether they’re a billionaire or a millionaire. The test worked for me every single time — as long as the investor answered it honestly.

Some years back, my partner and I met a very nice person at a bar, of all places, and she decided she wanted to invest into one of our films. She talked a good game about being a risktaker and was well off financially. We sent her the investment package on our films, and she took a few weeks to look over it. We finally got on a call with her, and she was still excited about investing, until I asked the magic sheep or sleep question. She went from having $500,000 to invest to only $100,000 to invest, and still be able to sleep at night without counting any sheep.

When I heard her rapid-reduction response, I spent the next 45 minutes telling her all the risks associated with investing into the film business. I was successful. I talked her out of the deal because I didn’t feel like dealing with the headaches of managing a nervous investor. It’s just not worth it. That is why, my entrepreneur friend, I recommend entrepreneurs self-fund their ventures as long as possible, and as much as possible, before bringing in any investor.

You don’t want money from investors who don’t have the guts to handle the high risks associated with any startup venture, just in case your venture turns into a clusterfuck of major proportions. You really don’t. And you don’t want to be counting any sheep at night either —worrying whether your investor is counting their sheep.

I can give you horror stories about nervous investors who claimed they had the guts to invest into startups, only to find out they didn’t have the stomach for it, much less the guts. Investing into startups is not for everyone; I think you have to be a little crazy, an adrenaline junkie or a madman like me.

My advice: Make sure you raise the right amount of money from an investor so they won’t lose any sheep or sleep if the venture fails. It’s as easy to ask for $1 million as it is for $10 grand.

Also, may sure you understand the terminology for an accredited investor (see Myth 38 and the Glossary).

Don’t short yourself. Ask the right amount of money from the beginning.

Brain Candy (BC): questions to consider and ponder

(Q1)
Do you think it’s harder to raise smaller money or bigger money? Why?

(Q2)
What is the hardest amount of money you have ever raised?

(Q3
) Have you ever been in a difficult investor situation after your venture failed? How did the investors take it? Did they lose any sleep or sheep over it?

(Q4)
If you’re an investor, what is your magic “sheep or sleep” limit? Are you sure? Or are you lying to yourself? Think again. What’s your real limit? FYI: don’t lie to yourself.

(Q5)
When you take money from investors, do you find out their investment limit?

(Q6)
Have you ever talked an investor out of investing into your venture? Why? What was their reaction?

Entrepreneur
Myth 36
| Investors are easily found

“I’ve got a great idea, so finding investors should be really easy.” I hope you aren’t thinking stupid-ass shit like that. Investors are not easy to find. And the right types of investors are even harder to find. Finding an investor is like dating. You have to kiss a lot of frogs before you meet “Prince Charming Money.”

Here’s a simple rule: Investors are easy to find if you’ve already made a shitload of money for them. Then, they’ll come to you. You don’t have to chase them. The tables are turning. Because of the entrepreneur revolution (see Myth 29), leverage and power has tilted to the entrepreneur’s favor in terms of raising capital. To put it bluntly, what you have is a case of the “Entrepreneur Bachelorette.” The entrepreneur is the hot chick and she has the candy. And we all know what candy is in this case. The guys are like investors, clamoring for her attention. Every one of them wants to get in her pants. Please do not take this analogy to the extreme and wear a wedding dress to a VC meeting.

I know an entrepreneur who can raise money like he’s Houdini. It’s always the same simple fucking magic. He makes a phone call to one of his investor buddies. After asking, “How’s the family?” he tells the investor he’s launching a new startup and needs two million bucks or whatever. The investor commits to putting up the money without thinking twice. Why? Because he’s already made a lot of fucking money for the investor. This entrepreneur could be starting shit.com and investors would throw money at him. I’ve seen this happen more than once. But it doesn’t happen every day. We all love to tell great stories about how some asshole raised a substantial amount of capital overnight, and hope we can do the same.

During the first internet craze in the mid to late 1990s, entrepreneurs were funded on shit ideas because Wall Street created an easy exit for Silicon Valley. After the Dotcom Bubble Burst of 2000, it was much harder to raise any type of money. Today, at least in Silicon Valley and Silicon Alley, raising money is easier — but not that easy. And, unfortunately, investors are not as easily found outside of Silicon Valley.

Finding investors and finding the
right
investors are two different ballgames. You need to do a substantial amount of due diligence to find the right investors. The problem is that you never know who will pull the money trigger and actually write you a check.

The investment process is fuzzy and unpredictable

Investment capital can come when you least expect it. Do not discount anyone when playing the fundraising game. And don’t let appearances fool you. I’ve met investors who dressed like they didn’t have one fucking dime, only to see them pull the trigger and invest. I’ve been in meetings with investors in their gazillion dollar penthouses and fancy suits, only to see them jerk off and invest nothing.

You can’t judge an investor by their appearance or the car they drive. Big money doesn’t always show their money cards. Walmart founder, Sam Walton, was a billionaire and still drove an old Ford pickup truck. Ross Perot, founder of EDS, drove an Oldsmobile. And Ikea founder, Ingvar Kamprad still drives a 15-year-old Volvo 240 GL.

Do your homework if you want the money

Many entrepreneurs are fucking lazy and don’t do their investor homework. There are many variables in play when looking for the right type of investor. Even with social media networks like Facebook and LinkedIn, it’s a real process finding the right investors for the deal.

If you’re looking for seed investors, venture capitalists are out of the question unless they operate seed funds. Look for angel investors instead. But how do you find the right angels? You have to do a substantial amount of research through multiple sources, especially through your own business network.

Once you find an appropriate investor, make sure they are the right one. When I talk to a potential investor, I ask the following questions in order to develop an investor psychological profile (see Myth 33 for more):

Have they invested before? If they have not, you’ve got a potential problem on your hands. If they have invested, what sectors? If they invested in technology and you want them to invest in your hot, new nightclub, you need to know more about them. They might still consider your high-risk nightclub venture for reasons other than ROI. They could be interested from an ego perspective — wanting to act like a big shot when they bring their friends, spouse or girlfriends. Find out the investor’s motivation.

What is their appetite in regard to size of investment? If they want to invest 10 measly grand, but you need one million bucks, you’ve got the wrong investor — unless you find several investors at smaller investment quantities.