Starting a Business to Fund Your Startup Idea

Nate Casey and his business partners had a winning idea: a website that lets users correspond with celebrities and professional leaders they admire. They had a name for their venture--Blazetrak.com--and they had entertainment icons and moguls who were interested in participating. The only thing they lacked was money to build the site.

Failing to secure investors, Casey and partner Corey Stanford instead opened a web consulting firm, Clariwebs, with the idea that they would use the profits from that venture to fund their true passion. After more than a year of bootstrapping, they dissolved Clariwebs and launched Blazetrak (along with a third partner, Ronald Harrison), bringing in revenue from day one. Two years later, the site boasts approximately 50,000 registered users from 202 countries and features commentary from 400 celebrities and experts. We asked Casey about making the transition from Clariwebs to Blazetrak.

How much of Clariwebs' revenue did you put into Blazetrak?
It wasn't a lot of money. Because we created this culture of bootstrapping, it only ended up being $10,000 or $15,000. We were using our own internal team to do a lot of the development work on Blazetrak. There was a lot of sweat that went into it.

How much time did you spend on each business?
We were probably 70 percent on the projects for Clariwebs. In the background, we were constantly building modules for Blazetrak. As we got closer to launching and it got more exciting, the amount of time we were spending on Blazetrak increased. By the final run, we were probably at 70 or 80 percent with Blazetrak.

Did you tell clients about the new business?
We did--particularly the ones we had established strong relationships with and who had become dependent on us for making decisions about their online businesses. It's hard, because you're trying to sustain and take care of customers for one business while in the back of your mind you're thinking about raising money for something else that you feel passionate about.

Any tips on starting a business to finance a product launch?
If you're starting a company or you're doing consulting specifically to raise money for a bigger idea, you have to be 100 percent vested in and committed to why you're doing it. The company that you're creating or the consulting work that you're doing to raise funds could be a big temptation once it starts making a lot of money. You can get really complacent. When we switched over fully to Blazetrak, that's when we started getting all these calls about potential jobs that would have been great if we were still doing Clariwebs. We were making $2,000 our first month on Blazetrak and thinking, "Wow--we could have taken a $30,000 or $40,000 Clariwebs project this month."

What's the biggest downside of funding a startup this way?
It's painful to use your own money, especially when you'd rather spend it on groceries. But that's what makes it a good thing. You get really smart with how you spend it. You say, "We really need to buy this software solution." And then you say, "Is this the right one? Can we find a cheaper version? Can we build it ourselves?"

You start to do a lot of research so you can spend less money or can learn a skill that will save you money over the long term. I figured out how to do our financials for Clariwebs by reading a book on QuickBooks. I use those skills even today.

We got so much out of Clariwebs that helped us with Blazetrak. A lot of the operational stuff, the staff and the work we did morphed over to Blazetrak. The value wasn't just monetary--we gained experience and relationships, too.

Startup Mentor is a place for all the Startups to find their virtual mentors. The forum is dedicated to giving ideas to the aspiring entrepreneurs and the first generation entrepreneurs. If you fee that you can contribute to the community of entrepreneurs by providing your articles, opinions, analysis and case studies, please send an email to startupmentor@gmail.com

How to Get Funding From Friends and Family

Most entrepreneurs have learned that it's almost always quicker and easier to get cash from someone you know, rather than angel investors or professional investors (VCs). In fact, most investors "require" that you already have some investment from friends and family before they will even step up to the plate.

You see, investors invest in people, before they invest in ideas or products. Since they don't know you (yet), their first integrity check on you as a person is whether your friends and family believe in you strongly enough to give you seed money for your new idea. If they won't do it, they why would I as stranger invest in you?

Friends and family will likely not expect the same level of sophistication on the business model and financials as a professional investor, but they do expect to see certain things. Here is a summary of some key items to think about as an entrepreneur before approaching friends, family, or even fools:

1. Don't be afraid to ask, carefully
If you set around quietly waiting for someone you know to offer you money to fund a startup, you will probably have a long wait.

On the other hand, if you open every conversation with "I need money," you won't have any friends or any money. Practice your "elevator pitch," and end it by asking for the order.

2. Be upbeat and respectful
Nothing kills everyone's optimism and desire to help quicker than a negative or arrogant attitude.

If they are going to put cash into your company, chances are that they will expect to spend a fair amount of time together, either helping you or certainly discussing progress. Nobody likes a downer.

3. Be passionate about the idea
Friends and family will quickly detect your level of sincerity and thought behind the idea.

You need to convince them that you have been working on this vision for a long time, and have done the "due diligence" on all the potential knockoffs. Daydreams and "the idea of the moment" won't get much respect.

4. Demonstrate progress and your own "skin in the game"
Saying that you need money to start is not nearly as convincing as saying that you have built a prototype on your own dime, but need more to roll it out.

We all know people who can talk a good game, but never get around to building anything.

5. Ask for the minimum rather than the maximum
We would all love to have a million dollars of funding to "do it right" and build the company of our dreams. But your chances are minimal of finding someone who will give you that much to start.

Set some milestones for three or four months out, and show what you can do, then ask for more.

6. Communicate the risks, and write down the agreement
Be honest with naïve family members and friends about the inherent risks of a startup – at least 70 percent fail in the first five years.

Don't take money from family or friends who can't afford to lose it. Think hard about the consequences of a possible startup failure and the loss of their funding.

7. Show some incremental value along the way
Look for ways to get some traction with a minimal product, while you are still developing the main event.

In high technology, this is called "release early and iterate," which allows you to make corrections as you go, as well as adjust for the market changes. It also shows progress to early backers.

8. Network to build investor relationships before you ask for money
Having a real project, rather than just an idea, is a strong positive when networking for angels or VCs. Now you really have something to discuss, and real credibility as an entrepreneur.

Build the relationship first, ask for advice on a real project, then maybe money later.

9. Don't think of friends and family funding only as a last resort
Overall, don't think of friends and family funding only as a last resort. There are massive advantages, like sharing profits with friends and family, as well as the strategic credibility than can be gained from funding from someone you know, rather than from a professional investor.

I hope all of these points seem like common sense to you, and you wouldn't think of handling it any other way. Yet, I'm continually amazed at how often I am approached as a professional investor by strangers asking for a million dollars to fund an idea, without hitting even one of the above points.

We can all recount horror stories of families and friendships torn apart by money lost on someone else's speculative dream. In these cases both the entrepreneur and the funding partner are the fools. Don't be one.

Startup Mentor is a place for all the Startups to find their virtual mentors. The forum is dedicated to giving ideas to the aspiring entrepreneurs and the first generation entrepreneurs. If you fee that you can contribute to the community of entrepreneurs by providing your articles, opinions, analysis and case studies, please send an email to startupmentor@gmail.com

Raising Money From Informal Investors

No matter who you're raising capital from and no matter whether you're raising money in the form of debt or equity funding, you'll be faced with the prospect of financing agreements that are written to favor the investor over the entrepreneur. Over the years, the agreements used by more informal investors have come to mirror the investor-friendly agreements used by venture capital firms. So it's critical, especially during the startup stage when your negotiating leverage with investors is often weak, to know the difference between what is tolerable and what is intolerable when it comes to structuring a financing deal.

Your guiding principle should be this: Look into your crystal ball and choose your first investor carefully. Don't agree to terms that will limit or restrict your ability down the road to grow your company or attract additional investors. When raising money from angel investors or relatives and friends, the terms negotiated by your first investor in a financing round tend to be the terms that last for the entire round. Similarly, the terms you agree to in your first round set the stage for later rounds. And giving away too much could come back to hurt you or your business.

So here are a few tips about what to look out for to get a deal that works for you:

Don't give pro-rata rights to your first investors. If your first investor (or his or her attorney) negotiates pro-rata rights (which means the investor is given the right to maintain ownership in the company through future investment rounds), all the investors in the round are likely to also want those rights.even if most wouldn't have otherwise requested them. Although anti-dilution provisions are in the interest of early investors, they're off-putting to later investors. So you'll need to balance the needs of your early investors to protect their stake in the company with how attractive your company will appear to later institutional investors.

Avoid giving too many people the right to be overly involved. The follow-the-leader mentality described above gets particularly problematic when you give up control of the business and require investor consent for business decisions. If you're not careful, you may find yourself in the tedious and time-consuming position of needing signatures from all or most of your shareholders to make future financing decisions or management choices--all because you gave these rights to your first investor. Similarly, some investors will want detailed reports on a weekly, monthly or quarterly basis. Agree to this only when it seems necessary. Spending a lot of time preparing and mailing reports, and requesting and collecting signatures, is probably not the best use of your time.

Beware of any limits placed on management compensation. In the past few years, angel investor groups have started to "over reach" by adding clauses to financing agreements that limit the salaries of senior management. While this type of restriction might make sense for businesses running out of money or ones in which the board of directors is too cozy with senior management, entrepreneurs should be wary about agreeing to such limits. Arbitrary limits on how much you can pay your top employees means you'll be limiting your ability to attract the best people at the time you need them most. What you might do instead is to agree to set up a compensation committee for your new business and review salaries as part of a total budget.

Request a cure period. To protect themselves, investors may want you agree to covenants and representations about your company that might be difficult for an under-funded startup to swallow. These can include representations about every legal agreement your business has ever entered into, and guarantees that your business is compliant with all laws, licenses and regulations in every state. Most agreements will indicate that you are in default of the agreement if you violate any of its provisions.

Agreeing to such sweeping provisions is often difficult for honest entrepreneurs. One way to deal with this is to ensure that you have a "cure period" in your financing agreements. You should negotiate a cure period of two to four weeks to allow yourself time to remedy your errors. This cushion will give you the time you need to find a solution or a "white knight" investor if you're ever vulnerable.

Restrict your share restrictions. Historically, friends, family and angel investors wouldn't request adding restrictions on the sale of shares owned by the founders or management team. These restrictions were typically added during venture capital rounds of financing in which retaining the founders and management team are critical to making the deal work.

However, I've noticed that angel investor groups have started to insist on these restrictions even during early rounds. While it's unlikely that founders' shares have much street value during the early rounds and it's unlikely that anyone will want to buy them, it's still not a good idea to agree to such restrictions. If you know that you plan to raise additional capital, having unrestricted shares is often one of your only bargaining chips with future investors.

When raising money from any type of investor, it's a good idea to speak to your attorney about whether he or she is seeing an investor-friendly or entrepreneur-friendly capital market. If it's not friendly, then be patient--recent experience shows that the tide will always turn.

Startup Mentor is a place for all the Startups to find their virtual mentors. The forum is dedicated to giving ideas to the aspiring entrepreneurs and the first generation entrepreneurs. If you fee that you can contribute to the community of entrepreneurs by providing your articles, opinions, analysis and case studies, please send an email to startupmentor@gmail.com

Raising Money From Informal Investors

No matter who you're raising capital from and no matter whether you're raising money in the form of debt or equity funding, you'll be faced with the prospect of financing agreements that are written to favor the investor over the entrepreneur. Over the years, the agreements used by more informal investors have come to mirror the investor-friendly agreements used by venture capital firms. So it's critical, especially during the startup stage when your negotiating leverage with investors is often weak, to know the difference between what is tolerable and what is intolerable when it comes to structuring a financing deal.

Your guiding principle should be this: Look into your crystal ball and choose your first investor carefully. Don't agree to terms that will limit or restrict your ability down the road to grow your company or attract additional investors. When raising money from angel investors or relatives and friends, the terms negotiated by your first investor in a financing round tend to be the terms that last for the entire round. Similarly, the terms you agree to in your first round set the stage for later rounds. And giving away too much could come back to hurt you or your business.

So here are a few tips about what to look out for to get a deal that works for you:

Don't give pro-rata rights to your first investors. If your first investor (or his or her attorney) negotiates pro-rata rights (which means the investor is given the right to maintain ownership in the company through future investment rounds), all the investors in the round are likely to also want those rights.even if most wouldn't have otherwise requested them. Although anti-dilution provisions are in the interest of early investors, they're off-putting to later investors. So you'll need to balance the needs of your early investors to protect their stake in the company with how attractive your company will appear to later institutional investors.

Avoid giving too many people the right to be overly involved. The follow-the-leader mentality described above gets particularly problematic when you give up control of the business and require investor consent for business decisions. If you're not careful, you may find yourself in the tedious and time-consuming position of needing signatures from all or most of your shareholders to make future financing decisions or management choices--all because you gave these rights to your first investor. Similarly, some investors will want detailed reports on a weekly, monthly or quarterly basis. Agree to this only when it seems necessary. Spending a lot of time preparing and mailing reports, and requesting and collecting signatures, is probably not the best use of your time.

Beware of any limits placed on management compensation. In the past few years, angel investor groups have started to "over reach" by adding clauses to financing agreements that limit the salaries of senior management. While this type of restriction might make sense for businesses running out of money or ones in which the board of directors is too cozy with senior management, entrepreneurs should be wary about agreeing to such limits. Arbitrary limits on how much you can pay your top employees means you'll be limiting your ability to attract the best people at the time you need them most. What you might do instead is to agree to set up a compensation committee for your new business and review salaries as part of a total budget.

Request a cure period. To protect themselves, investors may want you agree to covenants and representations about your company that might be difficult for an under-funded startup to swallow. These can include representations about every legal agreement your business has ever entered into, and guarantees that your business is compliant with all laws, licenses and regulations in every state. Most agreements will indicate that you are in default of the agreement if you violate any of its provisions.

Agreeing to such sweeping provisions is often difficult for honest entrepreneurs. One way to deal with this is to ensure that you have a "cure period" in your financing agreements. You should negotiate a cure period of two to four weeks to allow yourself time to remedy your errors. This cushion will give you the time you need to find a solution or a "white knight" investor if you're ever vulnerable.

Restrict your share restrictions. Historically, friends, family and angel investors wouldn't request adding restrictions on the sale of shares owned by the founders or management team. These restrictions were typically added during venture capital rounds of financing in which retaining the founders and management team are critical to making the deal work.

However, I've noticed that angel investor groups have started to insist on these restrictions even during early rounds. While it's unlikely that founders' shares have much street value during the early rounds and it's unlikely that anyone will want to buy them, it's still not a good idea to agree to such restrictions. If you know that you plan to raise additional capital, having unrestricted shares is often one of your only bargaining chips with future investors.

When raising money from any type of investor, it's a good idea to speak to your attorney about whether he or she is seeing an investor-friendly or entrepreneur-friendly capital market. If it's not friendly, then be patient--recent experience shows that the tide will always turn.

Startup Mentor is a place for all the Startups to find their virtual mentors. The forum is dedicated to giving ideas to the aspiring entrepreneurs and the first generation entrepreneurs. If you fee that you can contribute to the community of entrepreneurs by providing your articles, opinions, analysis and case studies, please send an email to startupmentor@gmail.com