Babson Entrepreneur Experience Lab

Elements of the Entrepreneur Experience

Investment

Pre-Funding Stress Disorder

The traditional entrepreneur capital continuum is undergoing dramatic transformation where both traditional players and new entrants are challenging the accepted models for funding entrepreneurs. In this changing landscape—driven in large part by the falling costs of technology—there is now more money that is more easily available in smaller amounts for early stage entrepreneurs. There are also a growing number of new models and tools for connecting entrepreneurs and investors as well as new models for structuring deals between the two. In many ways, the funding landscape is more democratic and hospitable than ever before.

Nevertheless, fundraising is one of the most difficult and emotionally taxing elements of the entrepreneur experience, whether one is in the majority of entrepreneurs who self-fund or with those seeking capital investment. For self-funders, the very real experiences of living off credit cards, borrowing from friends or family, re-mortgaging property, tapping into retirement accounts, securing loans from a much tightened banking system, or juggling multiple jobs are sources of constant stress. Those seeking capital investments find themselves on a Homeric quest with potentially dozens of unsuccessful meetings and enormous amounts of time taken away from the real work of building their venture. In the end, it often still comes down to who you know and the social capital you’ve developed. So despite the dramatic changes to the funding landscape, raising funds remains an immensely exhausting experience for most entrepreneurs.

Opportunities

  1. How can we continue to create new funding models appropriate to contemporary entrepreneurs?

  2. How can we better equip entrepreneurs to approach and
    cope with fundraising?

  3. How can we make clear the variety of funding options available?

  4. How can we educate investors about opportunities outside their area of expertise?

     

  5. How can we create funding models that work for non-traditional ventures, the square pegs?

Tapping the Community

Tapping the Community

In response to difficulties of fundraising, a number of new funding models are emerging that leverage “crowds” or communities as funding sources. Sites like Kickstarter and Profounder enable entrepreneurs to seek investments from a large unknown online community. These tools level the playing field, focus attention on the merit of a venture, and, in some cases, enable entrepreneurs to completely sidestep the traditional funding landscape. The founders of Coffee Joulies, patent-pending coffee temperature regulation “beans,” initially posted their product on Kickstarter hoping to raise enough money for a first round production. The entrepreneurs (dubbed the Two Daves), to their surprise ended up raising over $300K from hundreds of individual donors and future customers. With this funding, they’ve initiated manufacturing of their product in upstate New York and already have 8000 pre-orders to fill.

Another recent funding option takes a different approach, one that relies on micro-social networks. For instance, the Baylor Angel Network is comprised largely of Baylor Alumni interested in investing in early stage companies and staying engaged with their alma mater. Students carry out due diligence and much of the technical work thereby making it easier for new and smaller scale angel investors to become involved. The Designer Fund, the brainchild of Enrique Allen founder of 500Startups in Silicon Valley, is a community of internet and technology designers who formed to create a platform of investment, mentorship and resourcing specifically for designer founder companies.

Transparency and Access

Transparency and Access

Jimmy

Winning a local competition that came with a relatively small investment was enough to really get Jimmy's second company off the ground.

http://blip.tv/play/h7YEgsykRAA.html

Diane

Diane talks about the democratization of funding.

http://blip.tv/play/h7YEgszgaQA.html

Janis

Janis talks about the growing prominence of angel investors.

http://blip.tv/play/h7YEgs2pfAA.html

Part of the challenge in chasing traditional funding sources is figuring out how to connect with the right sources. Aspiring entrepreneurs might have incredibly robust social networks, but if it doesn’t include investors suited to their venture they’re still going to struggle. This struggle cuts the other way as well; many investors have trouble with deal flow where they have little expertise. AngelList is one solution for removing barriers to access and exclusivity in the process of finding angel investors. An online platform, both angel investors and startups post detailed information about themselves allowing both sides more transparency, choice, and access than ever before.

It is still all about who you know

It is still all about who you know

Bennett

Bennett had a difficult time getting funding as an immigrant with no connections.

http://blip.tv/play/h7YEgsvBDwA.html

Laura

Laura talks about how she got her Series A funding.

http://blip.tv/play/h7YEgsziOAA.html

Rachel

Rachel thinks very little money flowing to first times and having a track record makes a big difference.

http://blip.tv/play/h7YEgs3LQwA.html

Despite all the new models and increased visibility and accessibility of early-stage investors, success in fundraising still depends on who you know. Having the social capital and networks to secure personal introductions to potential investors makes all the difference in the world. Many entrepreneurs have just given up on the visible world of startup funding–the angel investor meetings, the pitching competitions, etc–arguing that all investments come through personal connections. Investing in startups is extremely risky and unpredictable, so anything that increases investor confidence, especially a recommendation from a friend, can make a difference. This is a place where serial entrepreneurs have a significant advantage. Having a proven track record and the networks from previous ventures makes the funding process dramatically different. Multiple serial entrepreneurs believed they could easily raise money based on their track record, even if the underlying idea was really bad.

On the other hand, not having robust social networks is a major impediment to securing capital. This is particularly true for entrepreneurs coming from underserved or poor communities whose personal networks do not include wealthy individuals. Likewise for immigrants who leave their social networks behind. Having immigrated from Africa, Bennett, an Omaha entrepreneur who started a solid waste and recycling business, recounts the difficulty of not knowing people and not having a family name to rely on or family to reach out to for financial support. He also nearly lost a critical client early on because the client “didn’t know him.” Fortunately, his banker stepped in to vouch for his credibility.

New Terms

New Terms

The traditional funding models largely rely on equity where investors own a stake in the company and typically wait many years in anticipation of a big payoff. In one of his first early stage investments Dan realized that the company could do everything right–increase revenues, secure funding from a venture capital firm, and finally be acquired by a major company–and yet he, the angel investor, could still have nothing to show for it. “With everything going right, it’s still hard to make it work as an angel investor.” Dan is now launching a new investment fund built around revenue-sharing rather than equity. In this model, his firm offers investment in exchange for a percentage of future revenue. So instead of looking for the next home-run, he invests in a company’s profitability. Think small ball investing.

The Square Pegs

The Square Pegs

Meg

Meg's venture doesn't fit neatly into a category.

http://blip.tv/play/h7YEgs6zWwA.html

Tom

Tom thinks for-profits and non-profits have a hard time mixing together.

http://blip.tv/play/h7YEgs7JFQA.html

Investors invest in what they know, so for entrepreneurs who fall outside of or in-between traditional categories, funding is even more challenging. These individuals must be very resourceful and often resort to elaborate schemes to secure the necessary funding. With her for-profit social venture focused on maternal health, Meg found that many foundations were unwilling to grant funding to for-profit entities. To access this funding, Meg had to contract an independent nonprofit to complete the work for her venture. Similarly, Raymond’s company is designing new products in the musical instrument business, a space where there are relatively few educated or interested investors. This has meant dozens of meetings, great feedback on their pitch and business plans, and yet no funding.

The Grind

The Grind

Bennett

Bennett talks about his perception of investors, and why he chose to fund his venture through banks.

http://blip.tv/play/h7YEgsrzYAA.html

Kevin

Kevin used multiple social networks to initially fund venture, but came up short. On the last day of funding, someone donated the final amount of money they needed to launch.

http://blip.tv/play/h7YEgsuOZAA.html

Doug

To help pay for the venture, Doug had to take a part-time job as a clinical doctor.

http://blip.tv/play/h7YEgsveTAA.html

Carla

Carla decided not to spend %100 of her time on funding because it was like "bashing her head against a wall."

http://blip.tv/play/h7YEgsv3EQA.html

Kristen

Kristen heard horror stories about getting investment, and views it as time spent away from building her company and customer base.

http://blip.tv/play/h7YEgsv3GAA.html

Kamal

When there was very little outside capital available, Kamal self-financed his venture through savings and a micro-loan.

http://blip.tv/play/h7YEgs2pUgA.html

Startup Chicks

Accessing funding is a nonlinear path; there’s no conventional path.

http://blip.tv/play/h7YEgs3LVQA.html

Nothing elicits groans like asking entrepreneurs about fundraising. Even successful serial entrepreneurs have bad stories about their experiences tracking down funding for their venture. For most, fundraising is a lengthy process that takes valuable time away from building their venture and involves countless more setbacks and frustrations than successes. This is true for even those who largely turn away from traditional fundraising and bootstrap their ventures through friends, family members, and their own funds. There’s an entire class of entrepreneurs who continue to work full-time jobs while building their ventures at night. Others are engaged in a continuous dance to secure resources to keep the venture moving forward.

In the lead-up to the financial crisis, Doug, who bootstrapped his marketing company from the beginning, took out a line of equity on his house to float the company through a couple of tough months. The continued success of the business came down to a single major contract. The extra capital from the house helped him secure the contract, but if he hadn’t succeeded, Doug would have lost more than just his business.