Kevin Koym, CEO of Tech Ranch®, goes through the types of investors that startups consider – going from customers through themselves and private equity.
Hi, it’s Kevin Koym, Founder of Tech Ranch. Today we are going to talk about investors. In our previous talk, I spoke a little about the importance of customer money. I have some bias as an entrepreneur, especially since I’ve always worked with early stage technology, to figure out the customer first. However, I understand the value of investment and I get a lot of individuals who come to me asking about my friends in PE, whether they should talk to VCs, or if angel investors are the way to go.
Customer money should be used throughout the life cycle of the company. Sometimes there’s a bias that happens because the media is always discussing investors. There is a time for everything, but you should always remember that your customer should be with you all the way through. If you don’t figure out who your customer is, but you figure out who your investor might be the first time, eventually you’re going to have a problem. It’s just a matter of having the right conversation with the right customer. If you have questions about that, see our previous video “Defining Entrepreneurship: Starting with Customers”.
Now, you’re always going to hear from me, because of my historical bias, that it is all about customers but that doesn’t mean I don’t like investors. The reason I always think of customer dollars first is because if you can actually figure out how to get a customer to pay you for your products, then the money guys are going to come running after you. In this segment we’ll talk through this plus friends and family, angel investment, venture capital and private equity funding options.
We have this series of investment milestones. Starting off, it says “bootstrap” and “f and f” which stands for friends and family. What is bootstrapping? This means that you’re pulling yourself up by your own bootstraps. That is, imagine you’re wearing boots, especially here in Texas, and you’re pulling yourself up to fund the company out of what you’re making from customers. I’ve brought six disrupted technologies to market and if you can’t figure out the customer, the technology is meaningless and it doesn’t make sense to even talk to investors.
Bootstrapping is most important at the very early stages, but a startup can grow through a combination of bootstrapping and customer traction. These companies stay capital efficient, that is, they’re very cash efficient. The limitation of bootstrapping, as well as getting investment from your friends and family, is it’s really difficult to figure out how you’re going to grow. You can’t grow that fast because you have to be very conservative.
With friends and family money, the difficult part is you have people involved in your deal that really believing in you, but because of this you are putting those personal relationships at risk. It mixes business and personal relationships and unless you’ve set your expectations right, can be a big liability.
Angel investment makes sense when you are ready to go from pre-seed to seed stage, maybe even all the way up to a Series A round. What is pre-seed? Pre-seed is before you really have things going and you are figuring out how to get the business going — maybe it’s $20,000. You might even think of the pre-seed and the seed stage as similar because the investment type varies. Angel investors are typically high net worth individuals who have specific areas of expertise. You might not just want their cash, but also their insight. In fact, there are some bad stories from companies that have come through Tech Ranch. For example, one of our start-ups got $300,000 worth of funding, but then because the Angel investor didn’t have any of the background in their area, that actually was a problem. So money is not money is not money. Sometimes with Angels if you find the right angel, you can actually have a way of really pole vaulting your company to a whole different level because the person is not only bringing their cash, but they’re also bringing their insight. And you should have a strong bias towards the individuals that have insight, not just cash.
Venture Capital is for later stages. Sometimes, you’ll have a VC that actually gets involved even at the seed stage, especially if your technology is very advanced. They might think about getting involved at the seed stage, but more than likely they’re not going to be involved until the Series A or Series B rounds. You have to remember that a lot of times the average VC fund can only make ten investments out of their portfolio. In a future video, we’ll actually talk about how to look for the VC firm that fit with your startup. VCs are typically sophisticated in their approach. They have to come up with a way of returning their money typically ten times the initial investment which is a strength as well as a weakness. It’s a strength in that they’re going to be committed to seeing that you really go for the moon. It’s a weakness because if you’re not headed there, they will consider blowing your company up (at least that’s the stereotype).
Next we have Private Equity. Every once in a while I get asked questions about this. Private Equity, if it comes, is after the startup has really gotten rolling. For example, one of our start-ups at Tech Ranch® has more than 300 employees. In order for them to get to the next stage, they needed a lot more cash and took on private equity money. Private equity money investors are not looking to take on a lot of risk.
If you find yourself in these types of situations, such as looking for PE money for your venture, that’s great. That means you’ve pretty much made it. Just be aware that you don’t want to be talking to any type of investor too early because if your company doesn’t fit the spreadsheet and the equations that they have, they’re not even going to talk to you and you’re just wasting both of your time.
We decided to talk about investors today because of your requests. Let us know what other topics you have interest in. With that we’ll follow up with you soon. Thank you very much.