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In response to Jason Calacanis’ war on individuals and organizations who charge entrepreneurs money to pitch their startups to investors, I made the point that the biggest scam perpetrated on entrepreneurs is the promotion of the idea that raising money from professional investors is something entrepreneurs should do if they want to be successful.

The truth of the matter is that angels and VCs are great, if you’re a member of the ‘startup establishment’, as Calacanis is.

What’s the startup establishment? Think of it as the Silicon Valley equivalent of the old boys’ network. Once you’re a member, getting meetings with investors and raising money gets a whole lot easier. While membership isn’t closed and it’s true that membership is often merit based (e.g. you’re an entrepreneur with a great track record), that doesn’t change the fact that life for non-members is a lot different than life for members.

Yet many entrepreneurs buy into myths that the startup establishment promotes about building new tech businesses, financing them and leading them to success. Here are eight things members of the startup establishment rarely tell entrepreneurs.

You are your top source of funding.
What's the best source of funding for your startup? Your own bank account. Sure the risk is high, but unless you're a high-flying internet impresario who can call up Sequoia Capital and get a meeting with Michael Moritz next week, the BYOC (bring your own cash) approach ensures that nobody else can stand in your way.

Friends and family rock. If you can't personally come up with the cash you need to start your new business, start talking to your friends and family. According to the Entrepreneurship in the United States Assessment, friends and family investments in the United States exceed $130bn annually. That accounts for a whopping 92% of the 'informal investments' made each year. Angels account for the other 8%.

The implication here: if you can't raise a decent amount of money from the people who are most likely to believe in your ideas and who have a personal justification to support your efforts, you might want to rethink what you're doing because professional investors are unlikely to be any kinder.

You're not going to raise money from VCs. According to the Small Business Administration, approximately 600,000 new businesses are started each year in the United States. Obviously most of them are not tech companies but for some perspective consider that U.S. venture capitalists invested in 851 internet-related deals in 2008. Only 314 of them were 'first sequence' (read: first-time funding) deals. As a rule of thumb, it's common knowledge that VCs turn down 90% or more of the companies that they meet with.

Is it possible that your company will be able to raise VC money? Sure. Is it wise to assume that your company will be able to raise VC money? No. Which is why you're probably in trouble if your plan on day one requires that you raise VC funding before your company can pay its own bills.

Pitching investors isn't as sexy as it looks. Thanks to conferences like TechCrunch50, pitching a startup has come to resemble American Idol. But if you ignore the last three items and decide that raising money from professional angels and VCs is the way to go, be prepared for a tough road that distracts you from your most important task: building your business.

The Sand Hill Road fundraising process includes a seemingly endless number of pitches, an equal number of rejections, and frustrating delays all around. If you're one of the lucky few who makes it through this with an investment offer, you'll most likely be presented with a term sheet that even the devil wouldn't ask you to sign.

Silicon Valley is a lot like Hollywood. Thousands upon thousands of people go to Hollywood each year looking for their big break. Many are extremely talented, many work incredibly hard and many network aggressively. Yet only a small number will actually get a big break. Chalk it up to an over-abundance of competition, bad timing or nepotism. Whatever the case, just remember that your chances of becoming the next Sergey Brin are about the same as your chances of becoming the next Brad Pitt.

Networking is overrated. Don't get me wrong, networking is important. But networking is like advertising: you have to target the right people. Far too many entrepreneurs make the rounds at startup industry events, trying to break into the 'startup scene' in the hopes that they'll gain access to the startup establishment. This is generally a waste of time. If you're going to network with anybody, focus on the people who matter (like potential customers).

Profit matters. Forget about “scale” and ditch the idea that you’re going to sell a wildly-popular social network that loses money hand-over-fist to Google for a cool billion. Unless you're a member of the startup establishment who has raised $20m to extend your "runway" (read: ability to operate at a loss) into 2011, you should remember that most of the world’s wealthiest entrepreneurs got to where they are by selling something at a profit.

You're not entitled to anything. As a startup entrepreneur, you don't have a right to funding, customers or deals. Nobody owes you anything. When things don't go your way you can be bitter about it and blame everyone in sight (see Exhibit B), or you can make the best lemonade possible.

Patricio Robles

Published 14 October, 2009 by Patricio Robles

Patricio Robles is a tech reporter at Econsultancy. Follow him on Twitter.

2381 more posts from this author

Comments (4)

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Gus Murray

Great article, I think too many entrepreneurs see raising capital as the first thing they do, if more startups bootstraped, borrowed from Friends, Family & Fools and financed their startup via customers cash they would look a lot more interesting to Angels and Venture Capitalists and would most likely not need to go down the pay-per-pitch route.

If your a new startup and thinking of raising capital through investors, check out Dragons Den on YouTube and see which startups get funding from these real investors and what questions they ask. Also note, what stage the startups are at, entrepreneurs should use investors for one of two reasons (there is quite possibly more); 1. To invest early in a project that has relatively high startup costs or 2. To fuel the startup with an injection of cash, contants, channels, or management experience to take the startup to the next level.

In the first case, expect to give up a large chunch of equity based upon the risk the investor will need to cover, this can be of set by letters of intent, contracts, etc.  In the second be prepared to defend your equity offering with contracts, customers, turnover, profit etc.

nuff said.

almost 7 years ago

Avatar-blank-50x50

Neil Gleeson

Patricio - great article!

The best related advice i received was "if you cant get customers to buy your product/ service, how can you get an investor to do so?"

Leads to all sorts of interesting debates about say,

  • investing for scale then monetizing, and so on,
  • business model design,
  • product design, etc

...but the fundamentals apply in my experience.

Happy to discuss!

almost 7 years ago

Avatar-blank-50x50

Neil Gleeson

Patricio - great article!

The best related advice i received was "if you cant get customers to buy your product/ service, how can you get an investor to do so?"

Leads to all sorts of interesting debates about say,

  • investing for scale then monetizing, and so on,
  • business model design,
  • product design, etc

...but the fundamentals apply in my experience.

Happy to discuss!

almost 7 years ago

Avatar-blank-50x50

Jack

Great article; really good to read something which doesn't perpetuate the myth of VC funding entitlement / requirement.

almost 7 years ago

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