Raising a fund!

Posted on December 10, 2011 by


Raising a Fund!

My last blog post described how some lucky guys from Berlin, the ‘6Wunderkinder’
received an investment of $4 million dollars.
The first thought was, oh great, they are so damn lucky. Starting their
business and getting direct support.
Well, the fogginess cleared up and I started to realize, this is not the norm.
Of course, I am very well aware of the fact, that start-ups need capital.
So I asked myself the question, where the hell does the money come from.
There are a whole lot of different startegies to furnish captial.
I am going to focus on fundraising in this one. Everything else would go beyond
the scope of this matter and definately kill the laptops battery.
So, fundraising.
As Paul Graham claims, fundraising is the second hardest part of starting a
start-up. The hardest is making something people want. This would be the top
cause of a start-ups death. Second one is fundraising.

The problem is set up as follows:

– markets do not forgive
– few investors
– investors are random
– amounts of investments really differ from each other ($1-open end)
– investors often invest into something they do not really understand
– investors usually do not act independent
– investors know each other
– the biggest factor in the opinion of you, is the opinion of other investors

How do we get out of this?

Paul Graham introduces a guideline on how not to die in the investment struggle.

1. Have low expectations

The lower your expectations, the less disappointment you will receive

2. Keep working on your start-up

Even though you spend a lot of time on raising money, do not lose your focus

3. Be conservative

If your project runs well, you are motivated to take risks.
If things look bad for you, play it safe.
In the case of someone offering money, take it, you never know if there will be a better offer.

4. Be flexible

Be flexible with the amount of money you want to raise.
Don’t try to focus on a certain number.
No matter how much you raise, you will get the job done. The more money you raise, the faster it goes.

5. Be independent

Have the discipline to keep your expenses low.
This shows investors that you can handle money and also know how to create some value on your own.
‘Ramen profitable’ decribes the situation in which you make just make enough money to pay for your living.
Investors like that. They like to help, but don’t like it if start-ups die without help.

6. Don’t take rejection personally

Do not ignore rejection.
Rejection can help you to reflect your plans or ideas better.
It even gets some people back on the ground.

David Hornik sums this up:

‘The numbers for me ended up being something like 500 to 800 plans received and read, somewhere between
50 and 100 initial 1 hour meetings held, about 20 companies that I got interested in, about 5 that I got serious about
and did a bunch of work, 1 to 2 deals done in a year. So the odds are against you. You may be a great entrepreneur,
working on interesting stuff, etc. but it is still incredibly unlikely that you get funded.’

You need to figure out what is not working and as a matter of fact, try to fix it.

7. Avoid inexperienced investors

If you choose to deal with an inexperienced investor, know that they might not know what they’re doing and so do their lawyers.
Try to handle the paperwork by yourself. If you do it yourself, you know whats going on.

8. Know where you stand

Investors tend to gather as much information as possible and at the same time comitting as least as possible.
Try to ask them what questions need to be answered, in order to get a decision.
This will show you where you stand and will give you a tendency.
The worst case is a ‘no’ after a long period of meetings and discussions.
Collecting information about investors is very important, because if you have information, you can focus on the ones which are most likely to invest in you.
Also, if you get an ivestor to say ‘yes’, the other investors get even more interested. A little competition amongst investors is always healthy.

My next blog post will continue dealing with this topic. I will introduce an online platform which makes it quite easy for you to organize the money you fund.