Inc. runs stories constantly on the challenges of getting funding for your business. You have to get your pitch right, approach the right investors--but even when you do those things well, there are a host of potential pitfalls in the process.
Peter Pham is one of the rare entrepreneurs who has had a very good track record landing money from VCs. His resume includes stints at successful startups like Photobucket and Billshrink, but he's perhaps most well known for co-founding Color--a photo-sharing startup that received a lot of hype and $41 million in VC funding but ultimately failed. But Pham is quick to point out that he's received plenty of rejections along the way, and even the successes come with important lessons, particularly in the case of Color.
I recently spoke to Pham, who's now chief business officer of the Santa Monica-based startup accelerator Science, to get his insight on what startup founders should do before they seek funding. Here are his tips:
Check your expectations.
Getting startup funding is more competitive than ever--so it helps if you don't fool yourself.
"Just two years ago, seed investors used to raise half a million," Pham says. "People investing on the seed level want to see much more in a business than they used to--traffic, conversions, sales. If you're an e-commerce company you already need to be earning $100k per month to get seed funding."
As for the Series A round, "investors want to see a path to profitability," Pham explains. "Most e-commerce companies are seeking $3 million to $5 million in capital in the Series A round, so VCs want to see half a million in sales and growing before they commit."
Solidify your brand.
Your business won't sell if your idea and brand image are murky. Identify your company's goals and values, then bring them to light through a solid social media presence, dedication to snagging media attention, a well-maintained blog, and reliable customer service and engagement. The founder(s) also need to embody the brand, so don't throw personal branding out the window, either.
"E-commerce is no longer just about revenue--it's about the brand. And building a brand means caring about your net promoter score," Pham says. "It doesn't have to be luring in a million people, but you need to have a decent amount of customers who are passionate about the brand. That extra attention spent on customer service and measuring customer satisfaction will go a long way."
Know your traffic and conversion metrics.
Revenue is the No. 1 question Pham fields from venture capitalists when seeking funding for a new Science company. You need to have steady (and improving) traffic and conversions that are ultimately leading to increased revenue. However, remember there's no revenue without a brand--your brand is what will further your conversions and traffic. Sales and marketing go hand-in-hand.
If you target your audience right, traffic and conversions should follow. But thanks to new technologies, creating a startup is cheaper than ever--and that means competition is fierce. You'll need to create a delicate marketing balance.
"Investors are taking the social presence score seriously," he explains. "You can see it when people write about the brand on Twitter, on blogs, etc. You should always ask yourself--who are my repeat visitors, and are they spending more?"
Answer this question honestly: Do I really need VC funding?
Pham suggests bootstrapping until you reach $100k a month in sales. Ouch. If that's not possible, think about crowdfunding or seeking the support of a mentor, family, and friends. Pham believes you need to have this level of revenue before seeking seed funding, or investors simply won't take you seriously. And when bootstrapping, don't forget about foundational resources, either--that means securing a partner, talent, advisors, and workspaces.
When I started Ciplex, I reinvested every penny back into the business. I spent more money than I earned from customers to create a better product. Don't focus on profitability too soon--avoid hiring full-time employees early on, and find efficient ways to get leads (like Craigslist). Be cheap, but smart.
Getting your startup off the ground takes a lot of work. Don't shoot yourself in the foot by seeking funding before you get the basics in place.
What are some other things startup owners should focus on before seeking funding?