Q & A: Getting Funded without Getting Fleeced!

Q. Chris McWillie writes: I am trying to find funding for this idea I been working on with my team. It's an online service/social platform,  but I don't want to give away 60 percent of my idea to some investor. Advice? A. Having been on both sides of the pitch table (both as an entrepreneur who has raised millions of dollars and as an angel investor holding investments in several companies), I can definitely give you some hard-earned advice on this matter. Build It, THEN They Will Come This is truly the Great Age of the Entrepreneur. Why? Because you can launch an enterprise in your spare bedroom, dorm room or on your mobile laptop that can generate millions of dollars in income or hundreds of millions in equity. Need proof? How about some squarely in the space about which you inquire… Facebook – The social networking site launched February 2004 from the Harvard dorm room and on the personal computer of 19-year-old Mark Zuckerberg. After rampant adoption, Mark received $500,000 from a single private investor. A year later, after even more evidence of success, venture funding followed. Three years later Microsoft purchased a 1.6% equity position for $240 million, valuing the company at $15 billion – yes, with a "b." Mark is now the youngest billionaire on earth with a theoretical net worth of $1.5 billion – ehm, yes with a "b." I LOVE this country! Craigslist – The online-classifieds site was founded by Craig Newmark in 1995, and didn't even incorporate until 1999. It wasn't until 2004 that Newmark sold a 25% stake in Craigslist to eBay. He still reportedly owns 75%, and the site (still private) is estimated to generate more than $150 million a year. YouTube – The video-sharing site was founded by youngsters Chad Hurley, Steve Chen and Jawed Karim. They offered a preview of their self-made site in May 2005, six months before the official debut. Only eight months later, and with the evidence of tens of millions of video views a day, did they get receive funding from a venture group. On Nov. 13, 2006, they closed a sale to Google for $1.65 billion, yes once again with a "b." Chad and Steve pocketed a few hundred million each. Jawed got a paltry $64 million. Not bad for a year and a half of work, eh? Del.icio.us – The social bookmarking site was launched by Joshua Schachter while working full-time at his "real" job in September 2003. Not until March 2005 did he quit his day job to work full-time on the site. He received $2 million in funding in April then sold to Yahoo two years after launch for an estimated $30 million. Bebo – The social-networking site was started by husband-and-wife team Michael and Xochi Birch. Not until 10 months after startup did they obtained $15 million in funding. They recently sold to AOL for $850 million, netting the couple $595 million personally. Point made? Here's the important lesson, because you can start a multimillion-dollar enterprise with a laptop, Internet connection and a few hundred dollars that attracts millions of users and maybe even tons of cash, this also gives investors the benefit of needing to invest only in business plans that have already started to prove themselves. There are two pieces of proof, especially for an online business, that you will need to show before you will even get an audience with a prudent investor: 1. Proof of Scale – Do people want what you have to offer? That will be proved by adoption. In today's online world, that means you will have to attract millions of users, at the very least show an extraordinary month-on-month growth rate with a user base in the hundreds of thousands to get a glance from an investor. 2. Proof of Revenue – We are way past the days of buying "eyeballs" (Internet 1.0) and nonrevenue-generating users (beginning of Internet 2.0). This is especially in the social-media space where 800-lb. gorillas already exist. You now actually have to prove, through revenue, that you have a real business that will make real money (profit). So, Chris, devoid of some sensational IP (Intellectual Property, i.e. a recent patent you have acquired, one a behemoth MUST have down the line) or Silicon Valley rock star management team (two things investors look for), I have two suggestions for you: SUGGESTION 1. Build and release your platform and see if the world beats a path to your door. Build a critical user-base mass and prove you can make money. You will then have something of interest to show an investor AND you will have created a valuation that will have their dollar buy less of your equity (you won't have to give up 60% of your baby). This also gives you the ability to launch and test several ventures to find the one that mushrooms. Case in point: The Bebo founders (the ones who just deposited $595 million into their personal checking account) launched six online businesses in nine years before launching Bebo. Or SUGGESTION 2. Decide that your business will be a cash flow business, not equity-based, build-and-flip plot. Forget complicating it with outside investors (trust me; it will alter your universe). As mentioned earlier, you can build and deploy a business online for very little money. It won't take much to make it profitable. And since you and your team own and control it all, it might turn into a nice little cow for you – cash cow that is. Go out and deploy away! You never know what could happen. Oh, one more example – husband and wife team Stewart Butterfield and Caterina Fake created a multiplayer online game that never found traction. The tools they developed through that project they used to launch the photo-sharing site Flickr, which they sold to Yahoo for a rumored $40 million. Key point? Get your line in the water… adjust the bait along the way. Go for it!

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