by Gregg Favalora, written for Entrepreneur America (2000)
According to Wired magazine, only 6 in 1,000 business plans gets funded. I think that sounds reasonable. The hard truth is this: getting cash is like going into battle. A successful campaign requires a cohesive team, a tight strategy, and a predictable supply of food for 6 months. Otherwise, you'll fail. Getting money just isn't as easy as it is portrayed in the media.
My story? I am an entrepreneurial engineer, was a winner of a business plan contest at MIT, invented some interesting technology, and decided to start a company. Despite having a great team and exciting technology (Actuality makes "floating" 3-D display systems for medicine and mechanical design), it took 18 months from our first VC meeting to close a seed round of $1.5 million.
There were clear reasons why this happened, and we made many "course corrections" until we hit upon the winning strategy. This list is the result of that journey. I hope you find it useful.
0. Get your ducks lined up.
This tutorial assumes that you have followed Rob Ryan's advice in making sure that your "ducks are aligned." That has happened when: (1) you have a stellar founding team, (2) you have actually spoken with real, human, warm-blooded customers in person and they show interest, (3) you have industry references, and (4) you have a concise business presentation. If you haven't done these things, you'll end up in the "VC holding pattern." Investors will show interest, but until you do 1-4, the conversation is on hold.
1. Commit or quit.
You must decide, once and for all, if you are going to go out there, ask for money, and give it your absolute all. This will require an impressive degree of conviction and confidence – 100 people will tell you "no," or "you're wrong," or "you're wasting your time." You must be headstrong; else, you'll be convinced to quit.
Do a reality check before you embark. Does your gut tell you you're right about your product? Do potential customers react positively? Are you an expert in the field, confident about your knowledge of the competition? Are you working with positive, forward-thinking, out-of-the-box people? If so, make up your mind. Get some resolve. And then go ahead, like a steamroller.
2. Persist
THIS IS ABSOLUTELY THE MOST IMPORTANT THING ON THIS LIST.
It may sound obvious, but your first week's rosy optimism will become a plodding malaise after a few months of hearing investors say "no," of co-founders quitting, of watching your entrepreneurial buddies not only getting funding but cashing out in 3 months. Don't give up. Talk to your advisors. Try to operate from a position of strength, so that you can operate in search mode for at least 6-12 months without damaging your life, family, career, or future.
Perhaps my firm's story will inspire, comfort, or scare you:
1988: I start studying the field that becomes the basis of Actuality Systems. I'm just out of eighth grade.
1997: Meet Rob Ryan. Form 7-person team for MIT $50k Entrepreneurship Competition. Win $10,000. Every teammate decides to return to their lives and leaves the group. I go alone to the Entrepreneur America ranch. I build a new team (3 programmers.) Take a leave-of-absence from a Ph.D. program at Harvard. One co-founder quits, sensing the entrepreneurial lifestyle isn't for him. We build a prototype 3-D display to show potential investors and customers.
1998: The 3 of us talk to real prospects (aerospace, pharmaceutical, video games, etc.) Anyone who will listen. Reporters. I give talks. Rob becomes Chairman. In August, 1998 we begin talking to top-tier VCs to raise $3 million. From August until December we talk to maybe 20 investors – they all love the team and technology, but we do a poor job describing the market and lack executive leadership. (Typical chicken-and-egg problem.)
1999: A bit depressed about not raising cash in the 5 months everyone promised.
January: Potential salvation: a high-ranking former VP from Silicon Graphics (SGI) becomes CEO. Still running Actuality out of my basement in Cambridge, Mass. We get $300k of potential investments, but are unable to close a full million, so we get nothing.
March: Our CEO quits Actuality, since we can't pay him. (Mistakes? Incomplete financials. Unproven technology. Now we've talked to 30-40 investors, including people in two local angel groups.) Searching for funding for 9 months now.
From April to August we sit in a depressed funk. To pay rent, my team gets part-time jobs teaching & coding. My family pays mine and even buys my groceries. Hey, wait! I get a call from a soft-drink manufacturer looking for a 3-D display. I build a prototype, put together a plan, and then – just when I see a way to succeed – they decide not to fund the project. I consider getting a job; maybe postpone the 3-D display for a bit, and return. Even interviewed for one job.
My girlfriend buys me the short children's book The Carrot Seed, by Ruth Krauss, about a little boy who tends to a carrot seed he planted that refuses to sprout. I read it an embarrassing number of times over several months. I take very long walks late at night.
August: One year of looking for seed funding. A terrific investor, Patrick Ennis at ARCH Venture Partners, connects us with our first investor: an angel in London. Yes! Weeks later, an article appears about Actuality in the Wall Street Journal. It's coming together! Phone calls pour in. I give a talk on entrepreneurship, and meet an investor there. He connects me to another, and them to another. Now we have over $500k raised. Momentum builds.
November: Close our seed round. Close again in December. Our prospectus calls for raising $400,000 to $1,500,000. We are oversubscribed! We close on $1.5 million.
2000: January. Pack up, move out of basement, and into office. It's an exasperating 18 months later.
At every point, we had to persist. Remember to persist in getting publicity, in talking to investors, and in talking to customers. We even chose a new technology direction in 1998. Just keep pushing ahead. As long as you believe my point #1 on the list, then stick with it.
3. Don't bet the farm.
Hedge your bets. Funding might be a long fight – worse, it might never materialize. Position yourself to operate from strength, not desperation. Don't use all your personal savings to completion, don't drop out of school (I took a leave of absence, and could have returned if all went sour), and don't put your family in jeopardy.
4. Get a great mentor.
I define "great" as (1) brilliant, (2) well-respected and successful, and (3) honest. If you're on the Entrepreneur America website, that's a great place to start.
5. Listen to your stomach.
As founder, you know the company's status best. Although you will have great advice from people you trust, don't ignore what your belly says. That includes (1) where to look for funding, (2) what customers need, and (3) how to structure the financing once it comes through.
6. Be Prepared.
Have a sharp website. Make business cards. Get voicemail (not an answering machine: digital ones sound poor, and mechanical ones stink.) Have an elevator pitch: a summary of your business which could be used to engage an investor during an elevator ride. Prepare a 1-page product/business overview that you can use to send to potential customers or investors. Make a great demo. Engage in networking with local entrepreneurs so that you have somewhere to go for immediate help, and so that you can help others. Be speedy: I've met industry leaders during on-campus talks only because I ran home two hours before, threw together an envelope of data on my firm, and gave it to them in person minutes before their talk.
If your venture is high-tech, then learn about Provisional Patent Applications. At the time of writing, they cost under $100, and may reserve you an early filing date which, effective for one year, allows you to postpone filing a full patent application. Buy the book Patent it Yourself by David Pressman, and follow the instructions to construct competitive barriers even while you're strapped for cash.
6a. Be concise.
Get the business story out of your mouth. Be short.
7. Track Costs.
Get inexpensive accounting software, such as QuickBooks Pro, and record every expense and each injection of your own capital. Do this religiously.
8. Get publicity.
Get your name out there. Specifically, you should (1) befriend reporters, giving them pointers to stories that they might find useful, so that in turn one day they may write about you. (2) Write articles of your own. (3) Always accept opportunities to give talks.
9. Be generous and have integrity.
Your co-founders are risking their own financial status by joining the startup. After conferring with your mentor and other entrepreneurs, give your cofounders a healthy equity stake for their work. Write it down, and stick to your word.
10. Defocus / Diversify / Re-plan.
The seed-funding process will require your initiative and creativity. Pay attention to every opportunity – a potential customer may appear and request something that deviates from your initial plan. Consider it quickly but carefully; they might (1) become a real customer, which will help you snag funding, or (2) teach you something unexpected about your market.
Which leads me again to:
11. Persist. Persist. Persist.
You have a plan. You're confident. You've talked to people who have turned you down for money, but you've been intelligent and remembered to ask "Why?" Using this information, you'll improve your presentation slides, appear at talks, and will one day – believe me – raise the money you need to build a great venture.
Good luck to you.
Gregg Favalora is the founder and Chief Technology Officer of Actuality Systems, Inc., a Boston-area firm developing medical devices for cancer treatment which use advanced 3-D optical hardware and 3-D software. He holds a BS in electrical engineering from Yale University and an SM in engineering sciences from Harvard. Feel free to drop him a line at favalora [at] gmail.com with questions.