There are a few things every entrepreneurs need to keep in mind before they decide to pursue outside capital.
By Flavio Lobato
Many startups would pursue outside investment without question. More money solves more problems, right? Unfortunately, the answer isn’t that simple. There are a few things every entrepreneurs need to keep in mind before they decide to pursue outside capital.
Before we dive into determining funding needs, it’s important to know how founders traditionally gain capital in the earliest stages of their company’s development. Let’s review:
- Step 1: Early on, founders will invest their own money to bring their idea to life. They use their personal savings to build out business plans, proof of concepts and product testing.
- Step 2: Next, founders seek out friends, family, and as a great investor once told me, fools for their next round of capital. At this stage, inventors need funds to continue testing their product and honing in on its capabilities.
- Step 3: While entrepreneurs are still sourcing money from friends and family (and fools!) at this stage, this is when product development becomes more sophisticated. At this point, the money sourced will help with early market validation and refine the prototype.
- Step 4: Typically, this is the step where entrepreneurs turn to angel investors to source large investments or capital. On average, angels allocate around $25-$50k per deal and angel networks invest around $250k per deal.
For most small businesses, the challenge of step 4 is less about finding any investor (as there are more than 300,000 angels in the US alone) and more about finding the right investor. Early-stage angels tend not to invest full-time and have other objectives outside of allocating capital towards startups. This leads many angels to take a minority passive position, which are small investments that are held until the company matures, rather than actively ensuring the company grows.
If this type of relationship works for how your business operates, then so be it. There’s more than one way to successfully run a business. But, for most startups to see real business growth, they should look beyond the dollar sign. Founders need to search for how invested shareholders will be in helping the company reach new levels of growth and success.
The demand for more involved angels is creating a new class of investors called super angels. Super angels, also known as micro-venture capitalists, connect entrepreneurs to more robust networks, help the company achieve important milestones and have a thorough investment process. They are able to be mentors to founders, as they usually have industry experience. Additionally, because they are more involved regarding the growth of the company, they tend to make bigger investments, helping early-stage companies accelerate through the earliest rounds of funding.
Super angels can help guide founders through the entrepreneurial journey. This class of investors goes beyond just writing a check, they take it one step further to help a startup grow their idea into a fully functioning company. Often, entrepreneurs can find and vet super angels through a Startup Nursery.
It’s important to remember that capital should be only one of many factors for an investor to qualify being added to the cap table. Before pursuing outside capital, entrepreneurs need to consider how an investor will mentor them, connect them and help them persevere.
Flavio Lobato is Principal and Cofounder of Ikove Capital Partners. Previously, he was an Executive Director at Liongate Capital Management, a $7 billion alternative investment manager based in London and New York. He was also a founder and CIO of Swiss Capital Asset Management in Lugano, managing over $1.5 billion in hedge fund investments for institutional clients. Prior to that, he was a VP at Goldman Sachs & Co. and a Director at Credit Suisse First Boston. He is a student advisor to the Harvard Innovation Lab (I-Lab) and Co-Head of Fintech for Harvard Angels of NYC. You can find him on Twitter at @flaviolobato.
Capital stock photo by fizkes/Shutterstock
