Funding Your Startup: The Money’s Out There

Everyone was a baby once, and every great company was once a fledgling idea. The questions for parents and startup companies alike are pretty much the same: How do I turn this vulnerable thing for which I have so much hope and love into a success? The answers are also very similar: You need love, devotion, determination, and - even more importantly for companies than for newborns -- money.

According to Thomson Financial Securities Data (TFSD), 1999 was the greatest year yet for raising private funding. More than $108 billion was devoted to bright new ideas, $46.55 billion of it from venture capital sources. Things have changed since then, and though conclusive data have yet to paint the picture for this year, the sentiment among those searching for funding is that things are tight.

But you can find funding for your brainchild, even in this somewhat hostile funding environment. As always, it requires a strong vision and a compelling pitch . But more and more, it also calls for true innovation, and the ability to show how you plan to turn a profit.

The Profit Motive

Venture capital firms invest using funds from a variety of sources - private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves. While the VC funding route is primarily suited to established entities, "angel" funds that provide seed money are more appropriate for true startups.

Wherever the money is coming from, though, remember that investors are primarily interested in one thing: return on investment. Bruno Lucarelli, VP of sales and business development at weatherama.com, estimates that you'll have about 30 seconds before you lose the interest of your audience during a pitch. What investors will want to know, right out of the gate, is "how fast will you be profitable, and how?"

That said, Lucarelli warns against jumping on VC interest that might be misdirected. "Stay away from anyone that is only looking to dump cash in and pull profit out with no strategic interest in your success other than quadrupling their money," he says.

Lucarelli claims that the fundamentals in the new economy are essentially the same as in the old: If you can prove potential profitability, you will get cash. Gone are the days when VC firms pumped huge investments into companies or ideas on the sheer hope of an eventually oversubscribed and overvalued IPO.

"I think we can learn a lot from our fathers, who participated in the building of the companies that provide the foundation for the new economy," Lucarelli says. "They made things or provided services for a profit -- period. It sounds corny, but that is what America was built on, and investors are now reacting to this kind of thinking."

Networking

Lucarelli's view that a good idea backed by a solid plan for profitability wins the race might be considered overly optimistic by some, particularly in this newly skeptical venture capital market. The other school of thought says that it's not what you know, but who you know. This school is backed up by indications that 70 percent to 80 percent of VC deals emerge from referrals. Industry contacts may play a key role in your funding search, so don't discount the power of networking.

That networking can extend far beyond your geographical area -- you do not have to relocate from Brooklyn to San Francisco just because you want to launch a streaming media company. And don't discount the potential of family and friends as investors. Money is money, even if it's from mom.

Of course, pushing your idea to everyone you meet presents a certain danger: No matter how unique or technically advanced your concept is, it can always be duplicated with enough money, so competition will always be a potential threat. It's nearly impossible to get an investor to sign a non-disclosure agreement prior to making your pitch. Still, though the fear of having your business idea stolen is real, the potential benefits of getting your concept out there far outweigh the risks.

The Pitch

Once your profit plan is solid and you've mapped out your fund-finding circuit, it's time to hit the road with your pitch. Even the best-laid plans can be ignored when not represented well. So if you're not a born salesman, you might consider finding one to sell your idea to investors.

There are also a few basic ground rules to follow when making your presentations. By talking to various VC executives, we came up with a list of do's and don'ts for your VC road show.

Do:

1) Cast your ideas in the form of an easily recognizable, definable, and understandable vision, and prepare that vision as a five-minute, high-impact pitch.

2) Present that pitch to everyone you can, and use every encounter as a learning tool.

3) Be sure your business plan is easy to read, free of typos, and grammatically correct, and that your contact information is easily accessible.

4) Know your competition, and be able to discuss your potential competitors. If you are unable to do this, you probably fit into one of these three categories: You are unprepared; You're too cocky and don't give the competition enough credit; or you actually have no competition (yeah, right).

Don't:

1) Be too arrogant. You may think your idea is the pinnacle of creativity or business intelligence, but you don't have the dough to back it up - the VCs do.

2) Be defensive. The job of a VC firm or investor is to tear your business plan apart and see if it bleeds. If you can't handle questions from these types, it's unlikely you'll be able to weather the storm of cutthroat competition in the market.

3) Be too impatient. Things take time; if you just pitched your idea or handed in a business plan, there is no need to call in and check if anything has happened in the last two hours.

Once you've convinced investors to contribute money to your plan, don't get complacent. Very soon you will need a respectable and capable management team to begin implementing your idea and producing results to show your investors. A smart, enthusiastic visionary who can project a message well might be enough to attract "angel" type seed investment. But once they've put up some cash, investors will quickly look for accomplished placements, and by B-level funding stage will want to see solid senior management, with 60 percent to 70 percent of your upper-level positions filled. By C-level funding stage, you should have all of your key executives in place.

The Bottom Line

In this tight venture capital market, the odds are stacked against nascent dot-com ideas finding funding. However, though the streaming media sector is still seen by many as an upstart, many VC firms say the industry is poised for explosive growth.

A focus on streaming media won't guarantee you the money to fill a loft office with abstract art and energetic professionals, though. True innovation is the essential, elusive element. When asked which aspects of streaming media are the hottest, one VC executive said he has been disappointed with many of the new ideas and emerging companies that are trying to come into the sector. "Nothing new or groundbreaking is coming in; no one is doing anything new," he said.

That's your cue.