The hardest money you will ever raise is the money you need to get going.
Sadly, the "venture" in venture capital has gone – at least for now. I've written in the past about the growing trend among Silicon Valley VCs to want to fund later stage companies. These later stage companies offer the perception that risk has been taken off the table and so make for "better" investments.
If you are a true startup – a founder or two, a good business idea and the guts to start a company from the ground up, you face a huge challenge to get money to start the company.
I've seen this first hand over the last couple of months as two of my friends have struggled to raise money despite being multiple-repeat entrepreneurs with great track records. Time after time, from VCs and Angel investors alike, they've heard the same comment:
"You are too early!"
Perhaps it's a reaction to a looming recession, a largely closed exit market (both significant M&A and IPO) or the overhang of a portfolio of later stage companies, but there's precious little appetite for early-stage risk.
The pressure of deploying larger venture funds coupled with the longer time to reach a liquidity event (now between 6-7 years for a new company) has driven a lot of investors away from early stage companies. Why take all the early stage risk when you can generate a (smaller) return by investing in a later stage company?
These dynamics place a premium on establishing proof points for your business BEFORE setting out to raise money. Build a prototype, get really detailed customer and market feedback, and earmark the people who are going to be the critical hires. If you can, bootstrap the business until you get growth and traction – then if you need money for expansion it will be easier to raise.
Above all, stay the course. This week, after almost a year of bootstrapping his business and getting endless "you are too early" comments, one of my friends got a great term sheet for a very significant financing. What had changed? In terms of the strategy, not much… But there were a ton of proof points on the table for all to see.