A typical startup goes through several rounds of funding, and at each round essay find product selling want to take just enough money to reach the speed where you can shift into the next gear. Few startups get it quite right.
A few are overfunded, which is like trying to start driving in third gear. I think it would help founders to understand funding better—not just the mechanics of it, but what investors are thinking. I was surprised recently when I realized that all the worst problems we faced in our startup were due not to competitors, but investors. Dealing with competitors was easy by comparison. I don’t mean to suggest that our investors were nothing but a drag on us. They were helpful in negotiating deals, for example.
I mean more that conflicts with investors are particularly nasty. Competitors punch you in the jaw, but investors have you by the balls. Apparently our situation was not unusual. And if trouble with investors is one of the biggest threats to a startup, managing them is one of the most important skills founders need to learn.
Let’s start by talking about the five sources of startup funding. A lot of startups get their first funding from friends and family. 15,000 from their parents to start a company. With the help of some part-time jobs they made it last 18 months.
If your friends or family happen to be rich, the line blurs between them and angel investors. 10,000 of seed money from our friend Julian, but he was sufficiently rich that it’s hard to say whether he should be classified as a friend or angel. He was also a lawyer, which was great, because it meant we didn’t have to pay legal bills out of that initial small sum. The advantage of raising money from friends and family is that they’re easy to find. The regulatory burden is much lower if a company’s shareholders are all accredited investors. Once you take money from the general public you’re more restricted in what you can do. A startup’s life will be more complicated, legally, if any of the investors aren’t accredited.