When VC funding isn’t right for your startupBy Laurie Peterson, MBA 11
Six months into founding my dream toy company, Build & Imagine, I landed a meeting with the venture capital firm I had most admired. They had a fresh entrepreneur-friendly approach and had invested in early stage companies in my product category. I had even applied to intern with them when I was at Haas. So, I was prepared to give the pitch of my life to get the funding my startup desperately needed, right? Wrong. I was there just for advice.
Sometimes venture capital money is not appropriate for your business. If many of the following are true about your company you may want to explore an alternative fundraising path: non-tech, hardware or physical product (though this is starting to shift), seasonal and/or hits-based business, mature or declining industry, profitable growth model (read: slow), going rate for acquisitions in industry is 5x profits rather than 50x revenue.
The above conditions are all true for Build & Imagine. I am a woman (a mom!) pursuing a profitable growth business in the somewhat stagnant toy industry with a physical product that is sold largely seasonally. And I’m gonna rock it!
I spoke with other toy entrepreneurs, reviewed the funding history of successful companies, and asked for advice from investors. Six months later my conceptual funding path evolved into the following:
Bootstrap > grants > crowdfunding > angels > angel groups > become profitable > line of credit > strategic investment > private equity > and, finally, acquisition.
Thanks to a successful Kickstarter campaign and angel round, I am proud to say our first three magnetic building sets are now available on buildandimagine.com.
1. Revenue. In addition to keeping the lights on, early revenue can help with customer development by providing feedback from real customers.
2. Friends and family. I was pleasantly surprised that my personal network was interested when I began fundraising. I was then confused to hear that since some of my investors weren’t accredited it was going to place a lot of legal restrictions on my fundraising. If you take non-accredited investments, consider allowing six months to pass before your next round to allow these restrictions to lift.
3. Government and private grants. I was particularly interested in the National Science Foundation’s Small Business Innovation Research grants as our product is educational. These ended up not being the right fit. They’re for R&D, and we needed executional money.
4. Accelerator programs and startup competitions. Y Combinator, 500 Startups, StartX, and Berkeley’s own SkyDeck offer office space, mentorship, and often cash in the form of a convertible note. Competitions offer prize money as well as connections. Build & Imagine won $2,500 and was offered $50K in investment via Berkeley-Haas’ LAUNCH.
5. Consumer crowdfunding. Build & Imagine raised $30,000 with Kickstarter to fund our design stage. Consumers essentially pre-ordered the product before it was even designed. Crowdfunding can work well for physical products that have consumer appeal.
6. Accredited investor crowdfunding. Combining money from a lot of different angel investors saves a lot of time and increases your access to investors. It works best with a respected lead investor whom other investors follow. I’ve heard good stories of AngelList and CircleUp.
7. Individual Angels. Angels tend to approach investing in startups less systematically than VCs, so they may be open to product categories and businesses that don’t fit the VC model. I needed to find investors who shared my passion for providing girls with the building blocks to become tomorrow’s innovators. I told a compelling story about Build & Imagine’s potential and demonstrated traction with product development, a patent application, and retailer interest. One introduction from a friend led to my lead investors, who then opened up their network, resulting in $600K in investments.
8. Angel Groups. Organized angels invest collaboratively to increase their deal flow. I applied to Berkeley Angel Network, Pasadena Angels, Harvard Angels, and Astia Angels, and got to the final forum stage with Golden Seeds. I found that angel groups were not a good place to go for seed-stage funding. If you have sizable revenue they are a viable way to raise up to $2 million.
9. Small Business Association (SBA) loans. If you are willing to guarantee loans or demonstrate that you’re funding the majority of the project with your own money, SBA loans through a community bank are a good option.
10. Strategic investments. Think about partnering with a company that is strategically aligned. A startup I worked for had a $3 million loan from a competitor/partner in exchange for promoting their products.
Finally, what is appropriate for Build & Imagine may not be appropriate for your company. You need to get out of the building to construct a meaningful fundraising framework. Then be open to that framework evolving along with your company’s progress.
A longer version of this article appeared on Fastcompany.com
Laurie Peterson, MBA 11, is an award-winning toy designer and the founder of Build & Imagine, a toy start-up creating constructible play sets to get girls building. The first three sets (one shown left) will start shipping in November.