financing methods
There a number of ways to finance ventures. Here is my quick and dirty analysis of each funding mechanism.
Self Funded - you are in control and own it but unless you are discplined and have experience, entrepreneurs tend to lose their head in the clouds. This is great if you are an expert and experienced already - if not get to the point where you can sustain professional help fast - or you too will need professional help.
Partners - Partners are great as they can counter each other but two partners with no experience does not equal one with experience. Partners where one is at a higher level or more dedicated is bad. Most partnerships break up. They are only good with two experienced people on the same level.
Dumb Money Angel: This is the guy that runs the carwash. This is great if you know what you are doing. If you too are clueless - besides for being lucky at finding financing - you are going to waste his money. So the question is if you have a conscience or not? Many a fund managers can’t sleep when they lose OPM.
Smart Money Angels: This is generally the best way to start a company, esp. if smart money is from the industry you are targeting. Usually you’ll get a fair valuation and validation on your concept and expert help achieving your goals and be able to leverage their network. It’s a win-win all around.
Tier 1 VC: This is good if you need a LOT of cash and is second best to smart money angels. Names like Softbank, Seq, DFJ etc… are great. These leads will take a lot of equity, rip you to shreds on due diligence but be fair and add value. If you can get them to invest that means something.
Tier 3 VC / Vulture Capital: Tier 2/3 VC = people playing VC’s that aren’t in it for building real value. Vulture Capital is selfish money that screws entrepreneurs (short term approach since our industry is small and word gets around). If you take on this capital, have a great friggin lawyer and make sure you are protected. Always ask for references of successful exits and failures from your investor and see what happened. Do your research. These guys will take 95% of your company if you are not careful.
Debt Financing: Take it if you can get it. It can be free. Mortgaging your house is self financing and not debt financing. Debt is actual real debt. Debt can kill a company as fast as it can help though so watch your ass. Sometimes you can get a mix of debt & equity. If you are careful this is great - if you are not careful you will give away your whole company. Why? Equity/Debt hybrids usually have a convertible clause where if you don’t pay it back in X debt converts to equity - you lose control and your equity is worthless. Then again if you can’t pay it back - your equity probably is worthless anyway.
Reverse Merger Financing: This can great (access to debt, liquidity, stock to acquire companies and incentivize employees) or horrible (work with shady people who stick you with nasty convertible debt and consulting fees and then convert the debt into equity, take control and kick you out. This is shady finance though can be extremely productive if you are careful - or it will destroy your business and make mortal enemies of the people pulling the strings.
As for me - I’m a serial entrepreneur, run BootStrapper.com, have self funded a couple ventures, taken on partners and broken up hard, run a seed capital group and am involved in some interesting ventures now.
