Stuck on Ramen

May 6, 2010

“I thought getting funded would be as simple as pitching my idea to a smart VC and getting a check based on the magnitude of the idea.” 

Two different first time entrepreneurs in their early twenties both made some version of this comment to me in the last month.  I like and respect both entrepreneurs and they were confiding in me that the fundraising process has been very disappointing and were seeking advice on how to close on some capital.

The fact is that raising money is really hard unless you’ve built a successful business before.  Of course, that actually makes some sense given that building a company is really hard and most venture-backed companies don’t return capital to investors.  The likelihood that an investor will fund a first time entrepreneur simply based on an interesting idea is exceptionally small.  Consider that the entrepreneur has an tremendous amount of conviction about the concept.  However, the investor has never heard the concept before and is likely hearing it (or at least this version of a theme) for the first time and is quite unlikely to share the depth of conviction that the entrepreneur holds.  In fact, a typical investor is regularly hearing credible ideas and cannot possibly fund them all.  Even if the investor is enthusiastic about the concept, she is likely meeting the entrepreneur for the first time and hasn’t yet established the trust and confidence needed to believe the entrepreneur has what it takes to execute the idea and be one of the few to succeed.

So what can a first time entrepreneur do to overcome the odds and get funding?  Here are a few tricks that Ive seen work well:

Figure out who in the world you know that can afford to put some money into the company and believes in you without caring much about the idea.  Even if it is a small amount of money, this can be used to create more evidence that you’re building a fundable business.  The value of such trust networks is actually way more effective for raising money than the idea itself.  If the people you know that have the means to bet on you aren’t willing to fund you, why should you expect someone that you don’t know to fund you?

Find experts related to your business, preferably ones who have built a successful company in the same space, and sell them on your idea.  The more you can sell that person, and the more credible that person is, the better.  If that person signs up as an advisor, that’s helpful, but a director is better; signing up as an investor is much better and taking a leadership position on the team is the best.

The most important thing an entrepreneur can do prior to raising money is to keep building the business regardless of the funding situation.  Continue to validate the market opportunity and try to prove out that the founders convictions are right.  Build the team with people who will work for sweat equity.  Create some early product and show market traction. It is very hard to know when you will have enough evidence to convince investors, but an entrepreneur that can continuously show progress has a good shot of convincing investors that he is scrappy and capable.  When an investor is trying to figure out if an entrepreneur has what it takes, that ability to keep building the business is great evidence.  Certainly the entrepreneur should not sit around and wait for a check in order to really start building the business.  At some point if the company is showing meaningful signs of living up to the founders beliefs, it becomes very hard for investors to ignore.

At what point does an entrepreneur hit the wall and cannot live on ramen noodles alone? This is a very personal decision and the reason that most successful entrepreneurs have inspiring stories of perseverance.  It’s a question of objectively assessing the depth of the entrepreneur’s conviction, how much struggle he can endure, and how much progress he can make without capital.  First time entrepreneurs rarely get a benefit of the doubt from investors and getting funded is rarely easy.  

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9 Responses to “Stuck on Ramen”

  1. Anonymous Says:

    Well said, even if it’s a downer for 1st timers. Looking back, I wish I’d spent more time in the tech/startup industry before jumping in – that would’ve afforded me better connections right off the bat.

    However, there’s nothing like ‘jumping off a cliff and and assembling your plane on the way down.’ Without much prior knowledge of the way things work, it allows you to be naive enough to try things – some work, some don’t.

    We just said from the start that we had to stay committed and see it through. Fast forward to present day and we’re here with a great product.

  2. Nathan Roach Says:

    Great advice. I’ve been there, and bootstrapping is hard, but its a great test of commitment. Even if the eventual goal is to obtain outside funding, showing that you have the determination to go it alone for a period of time is great evidence that the Angel or VC’s money isn’t going to be wasted.

  3. Anonymous Says:

    Excellent advice. Couldn’t agree more, and made the same recommendation here:

    http://thefastertimes.com/tech/2010/05/03/why-dont-women-get-vc-money-a-conversation-with-cindy-gallop/

    in which context, love the default female pronoun, just wish it was realistically more accurate on the investor side – too few female VCs, proportionately way fewer female angel investors 🙂

  4. Anonymous Says:

    As you so eloquently put it, first time entrepreneurs need to build the company, get traction, and then talk to as my smart people (including VCs) not about raising money but feedback on how to scale the company, etc. After laying that groundwork, then hit the road, but the good news is if you made it that far, getting meetings (and hopefully a term sheet) will be much easier.

  5. Anonymous Says:

    Thanks, Eric. I think I finally realized the difficulty of raising money when the teacher of my Early Stage Capital course said, “It’ll take you at least 6 months to raise funding.”

    Another side to the subject: I’ve met several entrepreneurs that have just said, “Forget Funding, I’m just going to build a business.” The investors then came to them. In the case of Mitch Free of MFG.com, Jeff Bezos came knocking on his door.

    Enjoying the blog.

    -Kevin

  6. Eric Paley Says:

    I didn’t mean for this post to be a downer for founders. Hopefully it’s empowering on some level. I think it’s way better than hitting your head against a wall for months trying to understand what it takes to get to the finish line. I was a first time CEO that was venture funded. It certainly can be done, but the process is a challenge and it’s best to prepare for it than have false expectations.

  7. Anonymous Says:

    Eric, great post. I think anyone who has started their own company has it at least in the back of their mind that they will gain traction and have every VC knocking down their door almost immediately. For these people (and I am one of these people), a reality check is the best advice anyone can offer.

  8. Jose Gonzalez Says:

    Cool !!

  9. Anonymous Says:

    Great article, I’m working on a startup in Northern Mexico. And definitely, Going lean is not the only way to go here, but also think it’s a great way to achieve success.


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