How do I get funding if I never plan to “exit”?

[angeleyescj]

@caterine Thank you! Very helpful, and I didn’t think about it that way. I think I know what those in my market value, but I’ll need to dig deeper to be sure. I appreciate it!

 

[simbamford]

@angeleyescj Before spending your savings and and taking a loan, try to get paying customers or pre-sale at least. You'll get much more confident about what to do and build. Get validation from your target audience.

I’m at a point where I am my own bottleneck and need to multiply.

I don't think you can be sure of that to know which path to take without customers.

VC money is just one option to build a company, if you'd only take it for the sake of keep building your dream, then nobody will fund you unless you are already been a successful C*O or exited a startup already.

 

[writerhomework]

@simbamford You’re also not your own bottleneck if you don’t have any traction at all, and you certainly don’t need to “multiply”. This is a reason you would take VC funding, to invest in your project. Focus, is probably what you mean OP.

Also, make sure you define your dream, if it’s a billion-dollar company in 10 years you’re not aligned, you’ll need VC funding.

You can also go about VC funding where you raise minimal money and offer control. The early investors would sell to later investors potentially, once you’re more stable. Hard to pull off though.

 

[angeleyescj]

@writerhomework Thanks so much you both.

My thinking is that my ideal way of doing validation would be through a big splash on crowdfunding. By big splash, I mean that since I believe my product is so different and solves a pervasive problem better than anyone else has, it could do well both for media buzz and gain a lot of traction in the crowdfunding campaign.

However, I worry that if I don’t have a manufacturing ready prototype, manufacturing quotes, and manufacturing plan… then all the buzz I create might validate my product because I take orders, but will go to waste because:

A) people may cancel if the lead time is too long

B) people may not order because the lead time is too long

C) if I underestimate the manufacturing cost, we could get killed

D) by revealing myself early, it gives me less of a head start against competitors

When I say I am my own bottleneck, I mean that I feel like I need help to get to the manufacturing ready prototype stage. Circuit board optimization, some additional hardware development/refinement…

Perhaps I’m overthinking what all I need to get validation?

 

[writerhomework]

@angeleyescj ah I see, I may have misunderstood what you meant then. those are all valid concerns, and you can solve for them. Because it's hard to predict any of those (except D, disregard D when starting out), although you may be able to reasonably assume some numbers, I'd use the "worst-case scenario" framework (also called maximin approach) and create a world where you can live with the worst-case scenario.

For example, let's say you put in all the work to do a crowd-funding campaign, you hit your goal, but every single customer asks for a refund within 3 months. What's the worst-case scenario? Well let's say you invested in manufacturing each order, without considering returns, then you'd be out that total investment, which may be something you can or cannot live with. If you cannot live with that worst-case scenario, solve for it. Create a refund policy, manage expectations up-front by telling customers it'll be 50% longer than you think it'll take. You could also only invest money for manufacturing after the refund window has concluded. Once solved for, re-evaluate the worst-case scenario. Let's say you've decided the you don't want to lose any money, and you've created a no-refunds policy. You won't lose any money in this case, assuming that you hit your goal. If you don't hit your goal, you also don't lose any money. Seems decent.

This applies to all levels, too. If you zoom out and think about your choices of crowd-funding vs VC funding.

Crowd-funding: worst-case is that you spend a bunch of your effort and you get crickets. You learn new skills, you then build on those skills and take another swing in the future, iterating on something that you assume will significantly change the outcome the second time. You lose little to no money.

VC funding: worst-case, you spend a shitload of time trying to raise money and you don't get any. worse yet, you can't spend the time you need to on the most impactful skills when it comes to marketing, customer research, etc, because you're trying to raise. If you don't raise in this scenario, you likely don't have a business, since you predicated the entire project on raising money.

VC path sounds like a shit worst-case scenario to me, because I want to play the game of entrepreneurship as long as I can and build skills while "staying alive" aka in business. I also think you need to go full-time if you go the VC path, compared to part-time with crowd-funding and bootstrapping, at least to start. The paths can change as you go, since the worst-case scenario changes too.

Hope that helps.

 

[613jono]

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[angeleyescj]

@613jono Thank you! Is an angel’s expectation different? What expectation would they typically have?

 

[613jono]

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[angeleyescj]

@613jono Thank you! That’s very helpful in understanding what an Angel might expect vs a VC.
And I completely see your point about either offering up more equity because I’m “green” or having a co-founder. This is why I wanted to do crowdfunding first, to have a clear validation of the product with sales, thereby hoping to overcome the “shit deal” risk. But I suspect I will need help even before that since one pretty much needs a manufacturing-ready product before doing crowdfunding/pre-sales.

 

[613jono]

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[jlyatt]

@angeleyescj Most angels want distributions.

 

[her354]

@angeleyescj I'm only investing in your company if there is an exit plan. I dont do this for charitable reasons. And when I have any worry that you may be creating a lifestyle biz, I have deal terms that allow me to "put" my shares on you, which means you are forced to repurchase my shares with interest. You can't run the biz forever once I'm in the deal.

My term sheet gives me control of your comp, dividends, debt, and other financial events so once I'm in the deal, you can't benefit in a big way unless we all benefit in a big way. That aligns our interests.

Many ppl don't like these terms and that's fine. So borrow from a bank with an SBA guarantee, fund growth organically, or figure out something else where you don't take on biz partners. But if you see value in taking my money to help you achieve your goals, expect that we will have already agreed to terms that mean we're working towards a profitable exit plan.

 

[angeleyescj]

@her354 Thank you so much, I really appreciate it!

The reason “exit plan” freaks me out, and maybe unnecessarily so, is because to me it connotes “get the business to look as good as possible as quickly as possible so we can sell it, even if it means putting lipstick on a pig.”

The focus then becomes “how do we make this a prime target for an acquisition”

I don’t want to think like that. I want to build a company, and if we do grow enough and need to expand quickly, then fine I could see an IPO might be a suitable way to do that if we need a significant amount of funding.

I want to make it big, want to make it profitable, and have no issues sharing the profits. I think it’s the “acquisition” mindset that is deterring me from VC funding, but please let me know if I’m looking at it the wrong way or if you think there’s a way to ensure a common mindset from the start.

The example you provided on forcing Re-purchasing of shares with interest.. is that something you set at the beginning of the investment or is that a term you set later? I can understand if, after investing, eventually the founder realizes they don’t want to get acquired and perhaps buy out the investor.. although perhaps the negotiated amount would be too large for the founder to be able to pay, thereby forcing selling. Maybe that was the point of your terms?

 

[her354]

@angeleyescj Exits don't happen by IPO.

Obviously that's not true, it's just that it is so seldom true that angels give IPO plans in startups roughly 0.000001% credibility.

The put option terms are negotiated before the investment is made.

Different investors have different motivations and expectations. I've been in deals that lasted < 1year and more than 17 yrs. I'm flexible. Angels can be more flexible than VC funds bc angels answer only to themselves, rather than sometimes itchy LPs who want the fund to close by a given date.

Make sure your expectations. No matter what they are, are aligned with those of your investors BEFORE you do a deal.

 

[angeleyescj]

@her354 Thank you!!

 

[mommymaid]

@angeleyescj At a bank. Or using debt in general. It’s either that or you are paying a royalty.

People invest for the prospect of a return. The return is key and it is your ‘cost of funds’

 

[crystalgem]

@angeleyescj No exit plan means no investors. Sorry.

 

[xboredx]

@crystalgem Is that true? You can buy your investors out?

 

[john25]

@angeleyescj Their exit and your exit don't have to be the same.

Tell them you plan on a private equity buyout, or leveraged management buyout. Or for that matter, just IPO, getting the IPO doesn't mean you have to sell, it just means you can

 

[angeleyescj]

@john25 Cool ideas, thank you!