The Cold Reality of First-Time Funding

by Giff on May 25, 2010

Earlier today, I watched Fred Wilson and Ben Horowitz debate lean vs fat fundraising approaches (very different from “lean startup” concepts even if often confused). The reality is very very simple: unless you are a celebrity/proven founder, “lean” is your only option. I don’t buy for a second that Horowitz would write a “fat” check to an unproven entrepreneur no matter how big the idea.

Too many people think they can raise money on an idea, a powerpoint deck, or even a mere prototype. From what I see, that is the exception, not the norm, regardless of chatter about a lot of seed money swirling around.

An idea and vision is necessary but not enough. Maniacal zeal is necessary but not enough. A smart, clued-in team is necessary but not enough. A first version of the product is necessary but not enough. You are competing against other funding-hopeful startups that have achieved all that PLUS initial traction PLUS a fit with the investor’s sweet spot.

It is not that the bar keeps moving in front of you, but rather that the bar has been at that spot for quite a while. Investors and the media just rarely clearly acknowledge this fact.

In Software/Internet, this means that you need to boil your very big idea down to something achievable. You don’t give up on the big idea, but you have to get ruthlessly pragmatic about the steps to accomplish the dream. This feels painful but it brings discipline and focus. You will burn through savings. You might have to consult on the side. You will move agonizingly slower than you want. Even worse, you will risk a more established entrepreneur wading into your space and raising a bunch of money with what seems like a snap of the finger. But that’s what it takes. It’s not for the faint of heart, but goddamn, there is *nothing* like it.

More:

  • For a great post on the topic from an early-stage investor, see Eric Paley’s Stuck on Ramen
  • For many great tips, see Venture Hacks
  • For an excellent book on Venture Capital, get Jeffrey Bussgang’s Mastering the VC Game — to be honest, I was expecting another bland overview of the VC world where nothing of substance gets disclosed, but Bussgang writes clearly and with much more honesty than most. So thumbs up from me, although the only *real* way to learn about all this is to privately talk to other entrepreneurs who have been through it.

P.S. for those curious, in Aprizi’s case, we did a very small F&F round and do not consider ourselves ready to do a seed round (much to the chagrin of my wife). We quietly shifted to open beta just recently, and we know that we have more to accomplish and prove. We do talk to investors here and there, but only to get feedback and new perspectives on our plans.  Right now, it’s all about execution. If you know of a great web developer in New York looking for a great team and new challenge, send them my way (giff.constable @gmail)!

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  • http://www.5o9inc.com/ Peter Cranstone

    Great post. After 20 years of doing this I can say that your article is right on the money. VC's are in one business and one business only – the exit business. Entrepreneurs are in the “customer solution” business. Occasionally both of those vectors align and good things happen. However in the majority of cases they don't. My focus is on solving the customer problem – money doesn't buy you that. Once you solve and get paid for it, the money shows up. At that point it's up to you to decide what you want to do.

  • http://codercofounder.wordpress.com/ Ilya

    Giff, I think you are absolutely right with your assessment. The chatter about the money either comes from VCs or entrepreneurs who have been funded. The successes get amplified because it's exciting to hear these things. Still the vast majority of startups who don't have access to capital have a much more tortuous path ahead of them. The important thing, in my opinion, is to recognize it and keep going.

  • http://hapnin.com/users/2 theschnaz

    +1 You will move agonizingly slower than you want. ugh

  • http://www.linkedin.com/in/scottjhoward ScottjHoward

    Traction is critical, investors don't want to arrive before customers. Smart money asks, “show me your customers” NOT “show me your forecast”. A startup needs all the things mentioned along with some luck but nothing matters more than customers and revenue. If you have a chicken & egg problem, be ready to sweat, and hear it from your wife. You gotta hustle to crush it.

  • http://argylesocial.com/ Eric Boggs

    Great post.

  • http://giffconstable.com giffc

    Totally agree. It's hard to pick winners in consumer web with no real data, and investors don't need to. You need to show the path and back it up with reality.

  • http://giffconstable.com giffc

    Agree. I wrote this post just to help newer entrepreneurs mentally prepare themselves for one they are in for. You have to be prepared to push the rock up the mountain!

  • http://twitter.com/nataliehodge natalie hodge

    kudos to you… we're in the same boat… good luck

  • Ryan

    How does one equate traction between FREE sites like Foursquare and SUBSCRIPTION based sites? If Foursquare was a paid site do you think they will have the same traffic? Traction is a relative term. While for some businesses (mostly businesses that depend on an advertising model) early traction is critical (lot of them achieve this by giving their service away for FREE), solid businesses based on a REAL product take time to gain traction. I find most VCs have attention span of a child – everything is now, now, now. Reality is VCs come in different shades. Most Web 2.0 VC types are shallow and display herd mentality. Few of them have the balls to take “risk”. They use fancy words like disruption, traction, and who can forget “eyeballs”. Solid companies are built in time and they often pivot before they hit the sweet spot. In my judgment a handful of today's VCs are capable of taking risk. In the history of mankind pioneers often take risk not follow others. Otherwise how do you explain all this bogus front-running around “location” based apps and apps built on the back of other businesses like Twitter. I salute the entrepreneurs who are toiling away building real products and not swayed by non-sense spewed out by know-it-all VCs.

  • http://giffconstable.com giffc

    well you can hardly blame an investor for wanting to minimize risk wherever possible. I used to be irritated that seed isn't really seed, but have long accepted it. I don't think you can define “traction”. It depends on way too many factors, not least being the specific investor.

    I don't have a problem with companies that put growth first, and revenue later — again it all depends on context. I am totally with you in saluting entrepreneurs pounding away to make their dreams reality. It is hard doing what we do, and we need to support each other as best we can.

  • http://giffconstable.com giffc

    you too Natalie. I wouldn't be doing anything else in the world!

  • cthomaschase

    agreed. like you said, it's a message we sometimes forget when we're surrounded by tales of crazy check writing around hyped companies. as you point out, getting a check written is a F*^% load of work, and for the majority of us the only option is lean/bootstrapped.

  • Bob

    It is not the critic who counts: not the man who points out how the strong man stumbles or where the doer of deeds could have done better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood, who strives valiantly, who errs and comes up short again and again, because there is no effort without error or shortcoming, but who knows the great enthusiasms, the great devotions, who spends himself for a worthy cause; who, at the best, knows, in the end, the triumph of high achievement, and who, at the worst, if he fails, at least he fails while daring greatly, so that his place shall never be with those cold and timid souls who knew neither victory nor defeat.”

    Theodore Roosevelt
    “Citizenship in a Republic,”
    Speech at the Sorbonne, Paris, April 23, 1910

  • http://giffconstable.com giffc

    Just read this today when Jason Cohen tweeted it. Hear hear.

  • http://nickpoint.co.uk Nick Barker

    Great post Giff!

    When we first started I passed our biz plan by a VC and he said “no one will give you funding for this.” He said “you need to build a product first”. I then asked how do we fund the development and he said “with credit cards!”

    In my experience you are right Giff – bootstrapping lean is the only way forward, so don't waste time pandering to the VC's. Get on with building a product and winning customers.

    It certainly is the long route with a SaaS startup – but you are right on, there is *nothing* like it!!

  • http://www.hypedsound.com jonathanjaeger

    Great post! We read TechCrunch to find out which companies got funded, we don’t read TechCrunch to find out the 100x companies that didn’t get funded. Newcomers might have a skewed viewpoint.

  • http://www.hypedsound.com jonathanjaeger

    Great post! We read TechCrunch to find out which companies got funded, we don't read TechCrunch to find out the 100x companies that didn't get funded. Newcomers might have a skewed viewpoint.

  • http://www.FreeRangeClub.com Lewis Robinson

    We are seeking seed $$$ to hire a savvy web developer and marketer well versed in promotion via social and other media, to help increase the visibility of our five-year-old food safety and healthy cooking blog– http://www.FreeRangeClub.com. Our award-winning investigative reporter alerts the public about toxic foods to avoid, while a nationally syndicated food columnist and other writers provide well-researched, thoroughly fact-checked and entertainingly written articles about foods and cooking (including an online cookbook-full of recipes). Videos are also posted. Any contacts or information would be appreciated.