by Monique Villa
In true 2019 fashion, a Twitter thread that I shared from a conference in Tampa, Florida, got me thinking.
I was sitting in a packed session on the topic of venture funding with a panel of investors and venture-backed entrepreneurs.
The audience of founders took copious notes while important, first-hand experiences were shared.
Everything was fine, until one of the speakers indicated to the audience that founders must seek out a ‘friends and family’ round prior to approaching venture capitalists — including dipping into their own personal savings.
The exact words included, “Show investors that you are committed.” I nearly fell out of my seat.
The “friends and family” round presents a conundrum for founders in many respects, namely:
- the presumption that all entrepreneurs with a startup idea need to have access to liquid savings and exceptional wealth at the onset of their project and
- the strain that borrowing money can place on personal relationships.
While there are certainly success stories involving a founder taking out a second mortgage on their home, or emptying their pockets entirely to buy the first batch of materials for what would become the next unicorn, these are few and far between. I’d go further and argue that it’s survivorship bias.
The potentially crippling financial implications for the founder, their immediate and extended family, and social circles are something investors should be ashamed of encouraging — whether directly or indirectly.
As an investor, I am particularly excited by the trend of founders launching their businesses in cities lesser known to the broader startup community. These cities are often rich in domain expertise and other resources.
One prevailing issue, however, is the current lack of cross-regional transparency to market expectations and what constitutes a “venture-backable” startup or not. Common knowledge in recognized startup centers like San Francisco often does not extend beyond city limits, even in the age of Twitter and micro blogs.
Knowing which sectors are particularly in or out of favor with venture capitalists as opposed to others — and why – is key when setting out to fundraise for the project you poured years of time and financial resources into.
Beyond sectors, expectations for funding round sizes, valuations, and projected growth also requires a finger on the pulse of an ever-changing market.
Venture capital represents a small fraction of the broader capital landscape, though I frequently meet founders who believe that they must appeal to venture capitalists in order to make their idea into a reality.
Meanwhile, tech has democratized launching a business, complete with free(ish) resources for launching a professional website, designing early marketing materials, and managing sales. In fact, infrastructure investing is on the rise given the scalability of such tools and corresponding demand from aspiring entrepreneurs.
While it may be relatively inexpensive to launch a startup in 2019, crowded markets have made growth increasingly expensive, resulting in larger venture rounds to fuel marketing budgets in crowded social media and search engine channels.
Almost daily, I encourage founders to seek early market validation first before putting up capital for expensive features to their product or service. This is especially true when a founder presents a comprehensive launch budget while believing they need to turn to their friends and family to foot the bill.
“I need to pay someone to build the app” or “I need to hire twelve people in the next twelve months” are only logical expenses if there is a long list of pre-sales and revenue pounding down your door.
Founders, please do not force a friends and family round. Even if you are exceptionally wealthy or happen to have access to discretionary funds to build your product or service, spending money prematurely does not ensure success.
My advice would be to first build the simplest, cheapest representation of your idea and take it to market. Pay $12 to GoDaddy for a URL, build a simple website for free using a template, and see if you can catch the attention of your future customers through your value proposition. They might just sign up for a waiting list, or provide you with early feedback on your intended features and product roadmap.
Then, if you plan to build a very large, sustaining business, take this waiting list and your plan to execute your vision to a select, curated group of venture capitalists for feedback. Scrutinize the advice you receive and identify the capital partners who are aligned with your vision. And then take as little money as you can to reach the next milestone.
As for your rainy day savings — perhaps your kid’s college savings account or the savings of your family friends – consider leaving these where they are for now. When your idea turns into a startup and becomes a rocket ship, you can still bring your loved ones in to share in your success. Don’t jeopardize livelihoods prematurely.
Monique Villa is an investor at Mucker Capital, a seed and “pre-seed” stage fund investing in companies powering a software-enabled world. She is also the Founder of Nashville-based ModernCapital, a community of startup founders and ecosystem partners committed to company building in the Southeast (#BuildInSE).