This post was originally published by HootSuite CEO Ryan Holmes on the LinkedIn Influencer blog. Follow Ryan on LinkedIn:
A year ago, my company received the biggest venture capital investment for a software company ever in Canada. Last month, we were able to add another round of investment—for a total of $250 million raised to date.
It’s a sum I couldn’t have imagined when I started out, and none of it came easily. Funding can be a mystery and a grind: It definitely was for me when I was getting Hootsuite off the ground. But over the years, I’ve learned a few things. So in a recent post, I invited you to ask me anything on the topic of funding for your startup or business.
Below, I’ve grouped some of your questions into 5 general funding dilemmas and offered insight based on my own experiences.
Dilemma 1: When should you seek funding?
Here a few key questions to help you determine if the time is right to seek funding for your startup: Is your industry poised for growth? Is the competition threatening to outpace you? Do you need capital to grow and stay in the game? I’d say if you answered yes to these, then it’s time to look into financing options.
Beyond that, one powerful lesson I’ve learned is the importance of overcoming your financing phobias and seek capital early in the game. What separates a successful startup from a flop oftentimes isn’t how brilliant the product or idea is. It isn’t how dedicated the entrepreneurs are or how skilled the engineering team might be. Instead, it often comes down to having access to the money needed to scale an idea quickly, outpace the competition and generate the critical buzz that attracts users, media and paying customers.
Dilemma 2: How do you connect with potential investors?
A lot of entrepreneurs are under a misconception (I know I was) that all investors are of the Shark-Tank variety—hostile, imposing and hard to get an audience with. On the contrary, the job of investors is to make investments and they want to talk. If they don’t, they’re losing money against inflation for themselves and their own backers. Their whole purpose is to deploy capital. In fact, if they aren’t out there meeting new entrepreneurs, they’ll go out of business! That flips the table a bit, doesn’t it?
But, before reaching out to anyone, ensure you have a compelling story for your business. Yes, having paying customers and proven revenue is important, but personally, I didn’t have those luxuries back in 2009 when I was starting Hootsuite. What I did have to offer, however, was a narrative: Social media is transforming how we get information. As people spend less time reading newspapers and watching TV and more time on Facebook and Twitter, companies and advertisers will follow suit. My tool makes it significantly easier for clients to use social media and reach customers there.
It’s not exactly a cliffhanger. In fact, these stories almost always follow the same tried-and-true blueprint: Here’s where the market stands today; here’s where it will be tomorrow; here’s how I’ve anticipated those changes and can capitalize on them. But without this basic narrative thread, it’s going to be hard to make headway with investors. Networking is clearly important to get a foot in the door, but a good story brings dollars to the table.
On a related note: A fantastic resource for people seeking investment is AngelList, which connects angel investors with entrepreneurs trying to put together an angel round. Since AngelList launched in 2010, it’s produced some remarkable results. Last year for instance, Rally.org (a startup that helps people raise money for good causes) secured an impressive $7.9 million in a round of Series A funding.
Dilemma 3: How do you build trust with a prospective investor?
Working with a difficult investor can be a nightmare. When choosing an investor, due diligence (and then some) is absolutely critical. Speak to as many firms as possible. Ask them for references from startups they’ve worked with. More importantly, pore over each prospective investor’s portfolio and reach out to its companies yourself via LinkedIn. Find out how they’ve been treated … or mistreated. (This small step could have saved me years of grief.) The Funded has user-generated ratings on thousands of investors and is a good place to get a quick overview of investor reputations.
Once you’ve narrowed down your prospects, get to know your investors before you sign on the dotted line. Are they personally likeable? If there’s friction before you commit, you can bet it’s only going to get worse once the ink has dried. And, while we’re on the subject of contracts, watch out for complex deal structures. The harder a deal is to decipher, the more likely you’ll be at the short end of it a few years down the road.
Dilemma 4: Is crowdfunding a good alternative option for a startup?
This is a question I’m often asked, and a great one, because venture capital certainly isn’t the only game in town. The success of campaigns by smartwatch Pebble and space-age cooler Coolest Cooler on Kickstarter shows that crowdfunding can raise sizable sums ($10.3 and $13.3 million, respectively).
I’d say crowdfunding is a great way to presell product and, best of all, it doesn’t dilute your equity like traditional financing options. At the same time, a successful crowdfunding campaign is proof that your product is viable and can open the door to further investment down the road. Basically, it’s a wonderful option for startups in the pre-venture capital funding stage. If you’re successful in reaching your campaign goal and smart about how you reinvest it back into the business, that financing can be enough to get you to the next level.
Dilemma 5: How do you overcome the fear factor?
Getting outside investment for your business can always feel risky. And the thrill (and fear) of closing a deal never entirely goes away. But one thing I’ve found is it does get a lot easier with each round!
Seeking serious funding for your business can be intimidating but, if there’s one single lesson I could impart, it’s to go for it (as cliched as that sounds). For a long time, I was convinced that bootstrapping was the only way to go. That’s not always true, which I luckily found out before it was too late. Capital, even a modest amount, can change everything. And once momentum starts building, the results can be extraordinary.
For more social media insight and to learn more about my company, follow HootSuite on LinkedIn.