This is the second post of a series exploring the 6 pillars of building thriving entrepreneurial ecosystems. The first pillar is risk-taking. Stay tuned for more to come in this series.
I’m beyond excited. The traction that my first post of this series exploring the six pillars of entrepreneurial ecosystems received was unexpectedly awesome. Within 24 hours it received over 900 shares and reads and over a dozen people reached out to me directly interested in the series and expressing their shared enthusiasm and gratitude. So thankful for supporters and those of you who share aligned interests and values or just read what I’m putting out there.
[tweetthis]The second pillar for creating flourishing entrepreneur ecosystems – access to abundant capital.[/tweetthis]
So here’s the next pillar. Following the first pillar of creating a risk taking culture, the second pillar of high-impact entrepreneurial ecosystems is access to abundant capital. It’s not a secret that finding and securing capital is one of the biggest challenges taking up startup teams’ (particularly CEOs’) time, energy and resources – and tend to be the biggest bottleneck in scaling faster. Beyond this, once an investor has been confirmed, getting that verbal “hell yes!” is just the beginning of the process. Receiving that term sheet and signing the final contract could be big hurdles and potential deal breakers along the way. Not to mention – there are quite a few entrepreneurs who rush so fast through these steps without getting to know their investors, that however much they thought that capital influx was going to be the game-changer for their company, in fact, signing with the wrong investor caused more long-term harm than good. Whether losing too much control or committing with an investor who prioritizes short term returns over long term vision, these common mistakes can be the death sentence for many companies. Those of you reading this whose startup feels like it is bleeding out and dying from hunger each day that it goes on without life-giving access to capital and thinks this next statement is insane, capital isn’t always the answer. Even partners’ at funds say sometimes it is best to say no to an investor.
Sometimes it’s best to say no to an investor.
That said, high-impact entrepreneurial ecosystems are reliant on access to capital. Long-term success of those ecosystems require not just access to stereotypical forms of capital, but also access to different types of capital (take off your blinders that say “VC investment or bust”) and with the right investors with fair terms, conditions, and a healthy relationship that values long-term over short-term and is centered around aligned values and shared goals. This post breaks down pros and cons of different types of capital in a SparkNotes version, how to improve your access to capital, how to know if you are “getting in bed” with the right investor (or as many experts now say, about to get married to the right investor), and examines different types of entrepreneurial ecosystems and their capital abundance. You’ll find top notch resources from the best leaders in the field throughout this post as well as access to differentiating opinions and insight from my experiences working at accelerators, interviewing hundreds of mentors, investors and entrepreneurs (successes + failures), and building thriving global communities. Here we go.
[tweetthis]High impact entrepreneurial ecosystems are reliant on access to capital.[/tweetthis]
Why Give A Damn
The importance of funding and financing access to capital for entrepreneurs is the second pillar for building flourishing ecosystems in conjunction with the first pillar of creating a risk-taking culture. However, access to capital is more important for growth in some regions, like Mexico and the United Kingdom, as opposed to others like Ireland and Spain who don’t see funding and financing as an imperative for growth. Luckily, Q2 of 2017 is seeing more investment (a projected $47.8 billion) than Q1; however, overall this year has seen less than investment than last year, about 7.2% less globally. But funding and financing ecosystem resources rely on access to stellar entrepreneurs and entrepreneurs taking advantage of the right resources and securing capital. But these ecosystems rely on not just an abundant environment of capital, but entrepreneurs finding the right financing options for them, the right investors and taking advantage of these resources is imperative – which is why this post focuses on just that.
Though access to capital is the second pillar of high-impact entrepreneurial ecosystems, is more important in some regions than others.
Types of Capital 101 – There’s More Than Just VC. Pros + Cons
Like many of you, my road to startups and entrepreneurship was not the straight and narrow. I don’t have an MBA or even an undergrad business degree, but rather on-the-ground, trenches experience but without knowledge of typical jargon and nitty-gritty financial terms. Some of you finance gurus or investors might skip this section or you may want to check out another intro to startup investments, but here’s an overview of types of funding and find the one that’s right for your venture before you skip to assumption VC funding is the “the answer”. I’ve done the dirty work for you all to make it simple and understandable in human terms as opposed to typical business jargon. Onwards.
Step 1: Decide whether you want to raise investment or not. The seemingly bright and shiny “yes!” might be one you have not quite thought through. Bootstrapping by self-funding your startup by using profits of your venture to grow or via personal resources is often the better path for success (though likely the harder one). There are many pros and cons to assess which path is best – whether raising capital or bootstrapping. As Parallel 18 mentor and serial entrepreneur Will Rosellini, CEO of Nexeon Medical Systems, in his mentor workshop, the longer you wait to raise investment, the more likely you are to succeed. The faster founders raise capital, the quicker they lose control. Keep that in mind.
[tweetthis]”The longer you want to raise investment, the more likely you are to succeed.”–Will Rosellini, CEO of @NexeonMed[/tweetthis]
Friends and Family Round
If you do decide it’s time to raise some money, one of the main funding options (especially for early stage, fresh off the ground ventures) is doing a “friends and family” round. These types of rounds can either be forms of debt financing – that is, funding with the intent to be repaid but don’t require giving up control of your venture – or equity financing in which a portion of your venture is exchanged for investment that doesn’t need to be repaid. Daniel Epstein, CEO of Unreasonable, argues a debunking of the old adage “don’t do business with friends”. He brings up great points from a new perspective and actionable tactics for creating flourishing relationships with friends and family and business, applicable for both having friends as your co-founders and doing business with loved ones. On the other side of the table, mentor Will Rosellini, investor, and serial entrepreneur argues the opposite in that raising a friend and family round increases your chances of failing and risk by 30%.
Raising a “friends-and-family financing rounds increases your chances of failing by 30%.
Arguably the most sought after type of capital but perhaps undeserving of all the hype. As Will Rossellini puts it, “Getting VC funding does not equal winning.” Now I don’t mean to discriminate against VC funding, it’s a form of capital that has fueled decades of success and helped high-growth startups scale rapidly and realize their visions. However, it’s not the golden ticket and I think we need to continue to widen our horizons to explore other options of capital. In fact, often times startups chase after this funding without realizing they don’t have enough traction or revenue to qualify for this type of funding, wasting valuable time and resources. If you are looking for seed stage investment, you already should have $50k in revenue and have a well-backed idea – and you definitely shouldn’t be looking for this seed round from VCs, who can’t invest at this level. Angel investment could be a good option, and my favorite and notable angel investors include Yahoo’s CEO & ground floor Googler Marissa Mayer, Google Ventures‘ Kevin Rose, and author of 4-Hour Body & 4-Hour Work Week Tim Ferriss (whose podcast series also rocks!). These three angels (my Charlies Angels of investment 😉 funded angel rounds for Facebook, Twitter, and Square to name a few. And once you do qualify for VC investment, typically after you have raised over $5M from your seed and angel investment rounds and have customers, deals, revenue, and profit (according to Rosellini), the odds are still stacked against you. Of a funnel of 160 start-ups considered for VC funding, only 4% will actually get funded. These stats make it a tragic phenomenon that so many companies see VC funding as the only access to capital option and the only badge of honor of Silicon Valley success as a way to get street cred amongst other companies. Don’t get me wrong – if your company is ready for VC funding, you’ve found the right investment, and you have enough time to truly chase this option – the perks of funding from high-profile investors like Andreessen Horowitz or Foundry Group are there, upping your credibility, being part of a world-class portfolio, and gaining access to some Titans behind your work. But be militantly transparent with yourself – is it worth it? If so, don’t forget that the hard work doesn’t stop once the papers are signed – expectations of success and high pressure come with any investment (including that of friends and family). Founder of First Rock Capital, Andres Barreto, shares his VC perspective and experience after going to the other side of the cap table from serial entrepreneur endeavors (including Founding Grooveshark, OnSwipe, and Pulsosocial to name a few), when he invests, he expects 30% of his ventures will fail, 50% will give him a 2-3x ROI, and remaining 10-20% will have a 30-40x return on investment. And these expectation returns, no matter how awesome your investor, leads to certain pressures in investor and entrepreneur relationships. I’m not trying to stereotype, and trust me, I’ve met many “unicorn investors” who are exceptions to this rule, but enter investments with a mentality that they are going to push you towards success or failure and they are largely playing a numbers game.
Only 4% of startups raising VC investment will actually receive funding.
Grants & Business Competitions
Grants are an obvious desirable and philanthropic funding. Though traditionally reserved for nonprofits, new grants are out at an increasing rate to boost entrepreneurial activity. Usually equity free, and who doesn’t like free money and tax breaks? However, rigorous application processes, impact metric assessments, and bureaucratic red tape is drawbacks to this type of capital. Not to mention, extremely low success rates and often extremely specific and restrictive regulations for those ventures that qualify. SBA, SBDC, and Bill and Melinda Gates are great go-tos. However, here are some other up and coming standout small business grants in 2017 to check out. I consider business competitions to also fall in this category, and here’s a Forbes list of business competitions around the world. YouNoodle is a great resource to keep in the know of global competitions as well.
There are more and more grants becoming available for for-profit companies, small businesses, and entrepreneurship.
Not only are accelerators good sources for funding for startups, but they are great sources for driving resources into entrepreneurial ecosystems. The presence of an accelerator doubles the amount of VC funding after its arrival to a region. Over 3 years, funding amounts increase by 13x. More important than money, accelerators come with game-changing resources and a global network that rally behind you and your venture, in both the short-term and long-term. I’ve seen this impact first hand and it is, for lack of a bette4 word, legendary.
A few notable accelerators are some of the notorious ones, what I consider the “ivy league” of accelerators, such as YCombinator, Techstars, and 500 Startups.
The “Ivy League” Of Accelerators
- YCombinator: Invests a total of $120,000 into each startup for 7% in equity. Allstars in their portfolio include conglomerates such as Airbnb, Stripe, and Dropbox.
- Techstars: invests $18,000 in its startups in exchange for 6% of their equity and also offers each startup a$100,000 convertible note, which can increase its share of the company to 10%. Since 2007, Techstars as worked with 1,027 ventures and over 11% of their companies have been acquired (however, an exactly equal number of a total of 119 are now inactive). Success stories include ventures such as SendGrid, Full Contact, and Star Wars celebrity Sphero are just a couple
- 500 Startups: invest $125K in exchange for 5% equity. They also charge an accelerator program tuition of $25K per company, which is deducted out of the $125K investment, resulting in $100K net cash to the company. They have programs all over the world from Latin America to Silicon Valley to Stockholm to Kuala Lumpur. Success stories include Twilio, MakerBot, and Behance.
Equity Free Accelerators
Though the three above mentioned are no doubt often, like VC funding they are often sought out by many startups as a badge of honor as being a Silicon Valley “chosen one”. However great they are, there are tons of more options in accelerators these days and some might be a better fit, especially considering the acceptance rate (like Ivy Leagues) is super small. YCombinator alone accepts less than 3% of applicants. Here are a few more accelerators to consider.
- Unreasonable Group: Based on a belief that accelerators should be entrepreneur-centric and “friction free” for entrepreneurs to participate, Unreasonable’s hyper-accelerators (i.e. 2.5-week programs) partner up with corporates like Barclays, Nike, IBM, and Pearson so entrepreneurs don’t have to give equity or pay anything to participate. If you are impact focussed and for profit, this one is for you. Alumni include Nigeria’s mobile payment platform for 6M users, Paga, $55M backed (including funders like Amazon’s founder Jeff Bezos) General Fusion, and Angaza Design bringing affordable solar energy to 1 billion people in 20 countries. This is one of many corporate funded accelerators.
- Echoing Green: Less of an accelerator and rather more of a fellowship, being an Echoing Green Fellow comes with lots of perks and notoriety and has been a launchpad for many flourishing social entrepreneurs. Their portfolio boasts alumni across many impact areas including history-making founders including Wendy Kopp, founder of Teach For America; co-founders of Michael Brown and Alan Khazei of City Year as well as the founder of SKS Microfinance, Vikram Akula. This fellowship comes with $100,000 equity free and a chance to be part of an A-Team of fellow entrepreneurs, innovators, and leaders of tomorrow. Founded by General Atlantic, Echoing Green is an example of a program funded by growth equity firms and investment arms.
- Parallel 18: Funded by government resources (which brings next level resources for collaborating with Puerto Rico’s government) and fueled by incentives that making doing business in Puerto Rico easy and smart, this accelerator is a 5-month program HQ’ed in paradise and gives $40K equity-free, no strings attached funding. Mentors include VPs from Facebook, Snapchat, and Google. #WorkHardPlayTropical
[tweetthis]The presence of an accelerator in an entrepreneur ecosystem doubles the amount of VC funding in the region.[/tweetthis]
Often an overlooked option, loans are easy and more accessible than you think. Banks out there – like Barclays and Banco Popular – are becoming increasingly more committed to creating the most entrepreneur-centric financing options in the world and teaming up with startups to fuel their success. Small businesses seeking loans of less than $100,000 were only successful 57%of the time – compared to a 73% success rate for those seeking loans above $100,000. The lesson? Ask for more and increase your odds for success.
There’s a 73% success rate for small businesses seeking loans above $100k.
Pre-sales platforms like Kickstarter and Indiegogo have been game-changers for startups these days. Success stories like Exploding Kittens, Coolest Cooler, and even notorious $55k raised for potato salad have gotten needed funding for product production from crowd funding. (Sidenote: I’m obsessed with the campaign I backed this week.)Especially has been impactful on hardware companies. The emergence of equity crowdfunding (here’s a great article from Amy Yeh of Techstars on what founders should know) and apps for micro-investing (Acorns is my favorite) are on the rise as well.
[tweetthis]Equity crowdfunding & micro-investing are emerging trends in crowdfunding.[/tweetthis]
My consensus? It’s an annoying one. But ultimately my first piece of advice is to do what’s right for you. Research the various pros and cons, have an honest assessment of where your business is at and what it needs to get to where you want it to be and reach out to mentors (and investors) for their honest feedback before pursuing one path. If I had to choose one option, it’d be a combination of bootstrapping and accelerators. Disclaimer – this is largely based on my experience working for an accelerator which we bootstrapped. Though when I started we worked out of a basement on less than minimum wage salaries (some of us not paying ourselves), the company ultimately flourished after closing several deals with multinationals a few years shy of a decade later. And we look back at screenshots from those dreary, in debt days of bank accounts in the red with pride. Though this bootstrapping came with small friends + family loans as well as banking debt financing influxes, overall the combination of the three paid off. But you have to commit to it over 10 years, and it’s not going to be easy. However, as Will Rosellini shares, if you want to be rich – don’t be an entrepreneur, to begin with. Over 10 years, entrepreneurs will make vastly less money than their employed counterparts working a 9-to-5 job. The second form of capital I recommend in tandem with mostly bootstrapping and along with having been behind-the-scenes of accelerators, I’ve seen first hand that spending that time in new space, with a new global network, and unlocking the ongoing benefit of resources that ensues is a game-changer. Both in real-time during the program and beyond. Taking the time away from being so busy pays off more than you know in the long-term, even if you feel you have to remove your focus from the grind – it really pays off. I got to see the impact on the entrepreneurs I worked with at Unreasonable (during the programs and after the fact from our exit surveys) as well as get feedback from the 40+ entrepreneurs I interviewed part of Parallel 18 cohorts who only said the being part of the accelerator was a gift that kept on giving. My funding recommendation = 40% bootstrap, 40% entrepreneur-centric accelerator, 10% debt financing & 10% friends-and-family funding. Rule of thumb: the more you can bootstrap for the longer period of time, the better of you’ll be in the long-term.
My funding recommended formula = 40% bootstrap, 40% entrepreneur-centric accelerator, 10% debt financing & 10% friends-and-family funding.
How To Improve Your Odds To Access To Capital
(10 Keys Success)
[tweetthis]Good things come to those who work their asses off and never give up.[/tweetthis]
- Join The Right Entrepreneur Group. Not any group, the right entrepreneur group.
- Accelerate + Incubate. Do it. Find the right one (the options are nearly endless and there are global networks like GAN that streamline the best resources) and do it. (Cheat sheet: apply for a bunch..the application processes are all nearly identical questions on applications…copy and paste is your friend. You didn’t hear it from me though.)
- Perfect Your Pitch Deck. Here’s a collection of all my favorite lessons on polishing a mind-blowing pitch.
- Explore Different Types of Capital. Don’t get stuck on VC funding. Think outside the Silicon Valley box. Re-read the above section if you skipped it.
- Lean On Mentorship. Resources for raising and managing funds stream on UNREASONABLE.is from writers like co-founder of Techstars Seth Levine, co-founder of Priceline.com Jeff Hoffman, serial investor and author of the best-selling book with Reid Hoffman Chris Yeh, legendary Heretic and Singularity VP Pascal Finette and Partner at Unreasonable Capital Ashok Reddy are clutch. Fred Wilson’s financing options series, First Round Review, and Andreessen Horowitz are some great ones to name a few.
Set Up Your HQ In The Right Place. Places like Puerto Rico that have absurdly awesome tax incentives for businesses or locations where the capital beer flows like wine (thank you Dumb + Dumber for that line), are great places to consider setting up shop. Get out of the noise of Silicon Valley and opt for lesser known communities either under-the-radar or on the rise. Though funding and finance options are stellar in the Bay Area and across the United States in general according to some global surveys and on the other end, some are suffering (like Pakistan, Spain, and India), other cities like New York, LA, and Tel Aviv are on the rise. Lesser known hubs like Boulder, Austin, and even Salt Lake City are making top lists.
- Do Your Research. Mattermark is my favorite resource of all time. You can also use resources like Crunchbase, f6s, and AngelList. Not to mention, an often times forgettable world-class tool of a Google search is still a go-to.
- Find Your Doppelganger. Find your venture in an investor portfolio, as mentor Will Rossellini shares. If you find your “doppelganger” of a venture (i.e. a company in a similar industry and at a similar stage) in an investor’s portfolio, it’s more likely you’ll be a good fit for that investor. Go one further and reach out to that venture and see what their experience has been and get the inside scoop. Techstars goes a step further and part of being part of their global network includes getting access to behind the scenes “Yelp of investors” where startups rank investors and share notes on getting investment as well as the “hot or not” / “naughty or nice” dirt on investors.
- Marry The Right Investor. Forget getting in bed with the right investor, finding the right investor and committing to them is more like marriage. It’s a 10-year commitment with an oath akin to in sickness and in health, or in acquisition/exit or in failure. Entrepreneurs turned VCs tend to be particularly promising options, being able to empathize with you and what it takes to be a successful entrepreneur and fundraiser. Know your venture, know what you want, and engage in militant transparency beforehand and radical candor to put everything on the (cap) table.
- Just Keep Swimming. “I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.”–Steve Jobs. A.k.a. Keep grinding, keep trying, and as Parallel 18 mentor expertly shared, that 10th ask might just be a yes. Throw out the adage good things come to those who wait. Nope! Good things come to those who work their asses off and never give up. Success comes to those who never give up, never surrender. Persistence is everything.
[tweetthis]”I’m convinced that about half of what separates the successful entrepreneurs from the non-successful ones is pure perseverance.” – Steve Jobs.[/tweetthis]
So there you have it. A SparkNotes on funding options and how to improve your odds on accessing capital as well as a survey on building a thriving entrepreneurial ecosystem relies on the second pillar of access to abundant funding. Now go forth and prosper.
[tweetthis]Burning Question…what do you think is the most entrepreneur-centric form of capital? And why?[/tweetthis]
Now go forth & prosper.