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The Best Startup Investment Is from Your Customers

 

The Best Investment

The biggest mistake I see entrepreneurs make during fundraising is taking too much money too soon and from the wrong people.

Seed Funding:

I believe the best money you can raise is from your customers. With the increasing popularity of crowd funding, and the new legal changes, it has become easier for entrepreneurs to secure non-dilutive funds for their ideas.

If crowd funding is not a fit for your company, you can attempt to seed your company by solving a real problem for a paying customer. This strategy is also a non-dilutive event that allows you to avoid accepting the wrong investor(s) too soon. A paying customer also provides credibility to your idea and valuable feedback.

If neither of the options above work well with your funding strategy, you can always raise money through a convertible note. A convertible note will allow you to avoid placing a valuation on the company and issuing equity. It is still critical that you select the right investor(s) and negotiate the right amount, as note holders do have the right to convert into the next equity round.

Once you’ve successfully seeded your company and have demonstrated growth, you are ready to look at Series A investors.

Series A:

There are three things to consider when selecting Series A investors.

1.  Board Seats – Most venture capital funds will require a board seat for the partner who leads the investment in your company. Naturally, you will not want to give away more than three board seats during your first institutional round, so you will need to structure this accordingly. Prioritize your list of investors and select based on fit, not deal terms.

2.  Expertise – As you bring on more investors, you bring on more opinions. Be certain that each investor you bring on is adding value. You don’t want to add an investor who is bringing capital only. Passive money seems like a good idea at the time, but those who do not have domain expertise are likely to become a liability when they decide they want to exercise their right to provide input into managing the company.

3.  Expectations – Make sure you understand and are comfortable with the expectations of your investment team. Most investors will require submission of financial statements and attendance at regular board meetings. It is best to be proactive in managing your investors’ expectations. Don’t wait for something to go wrong to ask for help. Communicate with your investment team on a regular basis.

In summary, less is more. Many entrepreneurs make the mistake of believing they should raise the most capital possible at the highest valuation possible. In reality, entrepreneurs should focus on taking the least amount of money possible from the right investors, regardless of valuation.

This post originally appeared on Atelier Advisors. Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs. All AlleyWatch readers are automatically eligible for a 50% discount on either of the courses using the preceding links.

Image credit: CC by Chris Potter

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About the author: Lili Balfour

Lili Balfour is the founder and CEO of the SoMa-based financial advisory firm, Atelier Advisors, creator of Lean Finance for Startups and Finance Boot Camp for Entrepreneurs, author of Master the Finance Game, and host of the Finance for Entrepreneurs broadcast on Spreecast.

After spending fifteen years in investment management and investment banking, she decided to develop a firm to cater to the specific needs of early-stage companies. At Atelier Advisors, Lili advises leading brands across industries: from tech to consumer goods. In the past, she has advised over 100 brands, including:

Bag, Borrow, or Steal, Visual IQ, Alpha Theory, Derivix, Practice Fusion, Peeled Snacks, Sustainable Minds, Firescope, Chix 6, Duchess Marden, Erin Fetherston, Eckart Tolle, and Stuart Skorman (founder of Reel.com, Elephant Pharmacy, Hungry Minds, and Clerk Dogs (sold to Netflix)).

While advising companies at Atelier Advisors, she observed a common theme – -brilliant founders avoided finance. She began writing about entrepreneurial finance to solve this problem.

As a native of Silicon Valley and a first generation Mexican American, Lili understands the importance of imparting wisdom learned in Silicon Valley to the rest of the world. Her goal is to teach the entire planet about entrepreneurial finance.

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