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Innovation Economy

How to raise money if you haven’t started a start-up

HIGH VISIBILITY Elon Boms of Launch Capital advises would-be founders to “go out and network and meet people.” HIGH VISIBILITY
Elon Boms of Launch Capital advises would-be founders to “go out and network and meet people.”
By Scott Kirsner
October 10, 2010

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This is the easiest way to get money from investors for your business idea: Be a person who has made millions of dollars for investors in the past.

But if you are unfortunately not that kind of person yet, what else can you do to tilt the odds in your favor? I’ve been asking local investors and entrepreneurs for their best advice about how to raise money for a new venture, especially for a first-time founder.

Here’s what they said: Whatever you do, don’t send your business plan randomly to investors. The odds are as bad as, or perhaps worse than, a first-time novelist shipping off a manuscript to big-time agents. “The best way to get an investor’s attention is well known,’’ said Larry Bohn, a onetime tech chief executive who is now an investor at General Catalyst Partners in Cambridge. “You find people they trust and have worked with before, and you have them call the investor and say why you and your idea are interesting.’’

That can make the investment world sound clubby (and it is, to some extent), but Bohn said that using LinkedIn, the social network ing site, can help first-time founders find the right route to a particular investor. So can attending networking events. “Someone from Launch Capital is at an event almost every night of the week,’’ said Elon Boms, managing director at the Cambridge firm. “Go out and network and meet people.’’

Many investors told me that they feel entrepreneurs who aren’t as successful at raising outside capital tend to talk to investors prematurely. They haven’t yet begun building a prototype or meeting with prospective customers and business partners to get “validation’’ that their idea will actually be useful in the real world.

“If you can get a business started with some alpha customers who are paying you even just small dollars, that’s a real indication that you have something valuable,’’ said angel investor Joe Caruso of Bantam Group. “The effort you put into doing that will accelerate the process of raising money. The first question I always ask is, ‘How do I know someone wants this?’ ’’

For certain ideas, creating a prototype or proof of concept can be expensive.

Mick Mountz, the founder of Kiva Systems Inc., a Woburn company that makes mobile robots that move products around in warehouses, said, “I used my own checkbook for the first year and a half and then raised about $150,000 from some friends and family members, just to demonstrate some initial progress on the idea.’’ He spent $30,000 of that to develop a first robot, and then shot a video of it that he could show to prospective investors. (Mountz adds that you absolutely do not want to take investments from a college buddy or an aunt who will spiral into bankruptcy if you lose their money.)

In certain industries, like energy or drug development, showing investors a rough product isn’t realistic, even if you’ve got an extremely wealthy aunt. In those cases, said Daphne Zohar, a first-time founder must surround themselves with a group of advisers who have done it before.

“And don’t be afraid to give a bit of equity in the company to them. It adds tremendous credibility,’’ said Zohar, a managing partner of Boston’s PureTech Ventures, which helps launch life sciences start-ups.

Entrepreneurs said investors frequently want to wait to see how much progress you are making in between, say, your first and third meeting with them.

“A lot of people think about the investor pitch as a single picture,’’ said David Rose, chief executive of Vitality Inc., a Cambridge start-up developing new drug packaging.

“But I like to say that it’s more like a movie. You want to engineer things so that you’ve signed up a new adviser you can mention in the second meeting, or a new team member or distribution partner you can tell them about in the third.’’

Bob Metcalfe, an entrepreneur-turned-investor at Waltham’s Polaris Venture Partners, serves up a “do’’ and a “don’t.’’ First, do not tell an investor about what jerks all the other investors in town are. (It makes the listener wonder whether you are the jerk.) Second, don’t focus too much on how you will spend the investor’s money. Metcalfe said that the fund-raising process for his first start-up, 3Com Corp., “turned more productive in 1981 when I finally got that VCs wanted me to tell them how they were going to get their money back.’’

Creating a sense of urgency is perhaps the toughest task for an entrepreneur raising money. As Rose puts it, investors have two modes: “watch, wait, and learn’’ and “worried I’m going to miss out.’’ Paul Maeder, cofounder of Highland Capital Partners in Lexington, said that by saying you are looking for just one investor, “they will think it’s a race and work hard. If you say you are looking for two investors, they will wait until someone else commits, which will never happen.’’ Maeder also suggests that by having multiple people in his network call him before you get in touch to ask for a meeting, you can generate “prebuzz’’ for your deal.

Sometimes, you may be pitching an idea that investors themselves don’t get. So ask them to talk to potential customers. For Sarah McIlroy, it was difficult at first to sell fortysomething investors, mostly male, on her business plan for a website that would allow young girls to customize their own clothing online. “I asked them to talk to their daughters about the concept and show them our sketches,’’ she said. It worked, and she raised her first capital for Fashion Playtes Inc. last year.

Like any good salesperson, make sure there’s a way to keep the conversation going, even if investors aren’t ready to open their wallets. Elon Boms said he turned down McIlroy four times when she presented her idea. “At first, it was just a PowerPoint presentation,’’ said Boms. “She had a long way to go.’’

McIlroy said she tried her hardest to convey “the excitement and the potential of the idea,’’ but what convinced Boms was when she signed up a manufacturing partner and started to show how the mechanics of the business would work once it was launched. Eight months after the initial meeting, Boms’s firm put money into Fashion Playtes. (And yes, investors at his firm did talk to their daughters about it first.)

Next week, McIlroy will announce that she has raised an additional $4 million for her Salem-based business. Leading the investment round is a Boston firm, Fairhaven Capital Partners, that hadn’t previously invested in a consumer-oriented e-commerce company.

“It worked out, but to be honest, it was sort of a surprise,’’ said Val Fox, Fashion Playtes’ vice president of marketing. “Sarah was just willing to knock on any door.’’

Scott Kirsner can be reached at kirsner@pobox.com. Follow him on Twitter @ScottKirsner.

ADVICE FROM LOCAL INVESTORS ON RAISING MONEY
Dharmesh Shah, angel investor and cofounder, HubSpot: Be honest with yourself and talk to someone who has raised money before. Very few ideas and very few entrepreneurs are venture-fundable.

Jeffrey Bussgang, partner, Flybridge Capital Partners: There is a tendency for entrepreneurs to exaggerate or spin in order to sell prospective investors.

Christopher Mirabile, managing director, Racepoint Capital Group: Have some skin in the game, a rough prototype, and some solid market data.