Do you need a financial plan to raise seed capital?

October 16, 2013

In addition to working in growth companies, I also mentor a number of entrepreneurs. One question I am asked often is “Do I need a detailed financial plan to raise seed capital?”

It’s an interesting question and one I will answer, but it’s actually not the right question. The right question is “Do I need to understand the financial levers in my business, and my current planned business model (or a few variants) when I talk to investors?”

The answer to that question is unequivocally “yes.” Investors, even seed investors who are investing in you and your crazy idea, want to know how you are thinking about turning your idea into a business. 

So to answer the first question, the answer is no you don’t need one. It’s probably a waste of time to have a complex financial model by month with multiple tabs. (I had a detailed model, but that’s because I’m an analytical person and I wanted to be sure I knew how we might be successful.)

Many entrepreneurs I speak with don’t have a detailed five year projection. They do, however, have a good sense of where the seed money is going to go (something almost every investor wants to know).

I think most early-stage investors know that projections are BS. But they do want to see:

-how you think about the business

-if you understand various levers for generating revenue, AND eventually generating profit

-your level of financial acumen

So you probably can skip the 5 year projection, but don’t skip the spreadsheet altogether. It’s the thinking behind the model that may help convince your prospective investors.


Crowdfunding- Everything is New, Everything is the Same

October 2, 2013

The combination of the JOBS act (open solicitation and communication of fundraising by startups) and crowdfunding sites promises to shake up the way that seed-stage financing gets done.  Crowdfunding sites, like AngelList, have offered open, public disclosure of startups and their financing activities. Now, with the addition of open syndicates, the combination could prove to be powerful.

In only a few days, syndicates of angels have emerged that have the power to seed companies entirely, with $500K to a few million, in a matter of hours. Already, we have seen formal and ad hoc syndicates form from Foundry Group (FG Angels), Jason Calcanis, Tim Ferris, LaunchAngels, and plenty of others.

Will this fundamentally change seed stage VC or angel rounds? Does this matter more for markets outside of Silicon Valley? Perhaps.

In effect, AngelList has enabled the rise of the ad hoc VC firm- these groups are taking carried interest on the syndicates they lead/create. Since many are well known, the angels are using their Internet notoriety to offer “regular” angel investors the chance to invest alongside them.

But… One of the hardest parts of raising early stage money is in finding a lead

Even if it’s a “party round,” someone still has to throw the party, buy the beer and the chips, find the location, and clean up after. As Chris Dixon points out here, financings tend to be oversubscribed or undersubscribed.

Traditional angel groups are tough to pitch, can move slowly, and the real challenge for the entrepreneur is in finding a lead, because most investors want to follow. One of the most frequently asked question in angel AND VC rounds: “Who else is investing?”

So while AngelList syndicates offer the chance to change the game for entrepreneurs by significantly altering the speed of the raise, it seems to me that the entrepreneur still needs to find that lead, push the rock up the hill. Once that happens, then the power of openness, networks, and speed can take over.