Sunday, December 9, 2007

Follow-up discussion: more on channels for raising equity

In follow-up to the Podcast discussion Frank Peters, Dave Berkus and I had a couple of weeks ago (, a few entrepreneurs wanted to learn a little more about the various channels of raising equity and particularly the characteristics of each channel.

Following is a 10,000 foot level, but focused discussion of the various equity sources:

Friends & Family

Your dad, uncle or a rich body – almost always non-strategic, almost always come with confused valuations and even more confuse structures that will be costly to clean-up later, and often the money raised gets to be wasted on experimentation. It is however, the easiest money to raise since they know you and trust you the most. Raising Friends and Family round generally does give the VC’s and the Angles the warm and fuzzy that at least your relatives and friends trust you.

Angels (individuals & groups)

An individual angles or group of angles that pull together to invest – generally invest as individuals or as an LLC. If you have the right angel or the right lead (if a group) to spearhead the process things go smooth, the right group or person can bring significant focus to the process, the wrong angels can introduce a confused direction, non-professional angels often offer less assistance than you expect or they originally may claim, professional angles go out of their way to help a good entrepreneur. Angles often do not make second round investments, if dealing with a group the process may take longer than you expect. Example: Tech Coast Angels


Provide a place, some computer and office support, some HR and accounting support -- only the focused ones work, a lot of incubators have real estate motives which gets them derailed from operations, often too dilutive for very strong teams. Example: Idea lab.

Venture Capital Firms

Organized large funds with a few managers in charge of investing the funds money and helping portfolio companies on the path to exit - funding ratios are very low (less than 1%), generally. The firm matters A LOT, concept stage investments are possible for insiders or entrepreneurs they have worked with before, but new deals must meet minimum requirements. Strong team is almost a must have. Example: DFJ

Management Intrusive Solutions

Informal Virtual Incubators – Individual angels who take a line position – they do make an investment and often request some options. Some entities have a formal limited fund with experienced operator partners offering money & interim CXO; usually utilizing convertible loan vehicles with options. Example: Momentum Ventures.

Risk Sensitive Loan & Warrant Models

Non-convertible loans with a warrant kicker – taking the first position, acting like a bank, but with a very aggressive risk profile. They are an excellent vehicle to bridge to the next round, but could be very expensive money. Example: Agility Capital.

None-intrusive Capital & Execution Models

Structured and staged investments coupled with extensive execution assistance without management replacement and with targeted valuation increases. This is a new and innovative model that reduces entrepreneur dilution and provides very early stage companies with what they need the most: focus and connections. It works best when the company valuation is not too high and the product is ready for market. For example: Venture Farm.