Plan B for your startup, or how to raise funds

How do most entrepreneurs attract venture capital? Typically, this happens as follows:

Plan a

Step 1.

The entrepreneur decides: “Let's raise $ 1-2 million - so that we can focus on development and marketing and not worry about money at all. We will do everything on time and then we will attract another five million in two years, and we will sell ourselves or go public. ” In fact, many companies actually attract 1-2 million or more due to competition in the venture capital market.

Step 2

The entrepreneur fantasizes: “Our most conservative forecast is one million users in the first six months. “We must prepare to scale our decision, and that’s what the venture capitalists gave us money for.”

Step 3

The product is late. Everything as usual. Six months later, you have 10,000 users, not a million. The company has significantly increased its monthly expenses. In fact, in vain. There is little cash flow, but venture capitalists still believe in the original projections.

Step 4

Incredibly, the company is still able to raise an additional 5 million. Life is Beautiful. The entrepreneur “knows” that the situation will improve and inflate costs in order to prepare for exponential growth. Growth is bound to come soon.

Step 5

Another six months have passed - the virus does not spread the product. Venture capitalists, whom the entrepreneur thought of as true believers and friends for life, finally opened a demo and three products from other companies that do the same.

Step 6

Coming out of the dusk, the day after the meeting of shareholders, the main investor calls the entrepreneur on his mobile phone and says: “We somehow don’t see how you are going to do all this. We want to organize your company a “soft landing” - by selling it to some big player. And we will call friends from Yahoo, Google and Fox Interactive - maybe someone will be interested. We need our grandmothers back, dude, before you all let them go, because my partners think that all this takes too long. ”

Step 7

The businessman hangs up. He is in shock. A week ago, no one could even think of anything like this. The entrepreneur thinks that investors are in a state of temporary insanity. He calls investors “stupid, arrogant, bad people who don’t eat the topic ” - forgetting that he spent three years and three million dollars on the basis of unreliable arrogant forecasts.

Step 8

The company is rapidly collapsing. Nobody wants to buy it, and none of the big uncles became interested. This is a fundamental fact - companies buy, but not sell. An entrepreneur or investor rarely can call a prospective buyer and complete a deal. An entrepreneur simply creates a company - and answers a call from a potential buyer.

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The company is sold. The small intellectual or tangible assets that she has left are now valued at a cent per dollar of investment. Some money was returned to investors. Management has two unrealistic hopes - to buy a company from investors (which, in fact, is not worth the candle, and management quickly understands this) or to convince shareholders of the presence of social responsibility for the business as a living creature. Lawyers chuckled.

Plan B.

But there is also another way - Plan B. You take quite a bit - and not for creating a product, but for its development. How it works:

Step 1.

Somewhere you dig out / gnaw / tear from your heart $ 100,000 or even less - maybe from friends and family, maybe from your colleagues. You do not get paid. You live with your parents and continue to work your full time at Microsoft. You hope that your spouse will not abandon you, and your beloved dog will not starve to death. You do not have an office, you work remotely, and meet with your partners in a coffee shop. All that you use to work your project is free software or shareware.

Step 2

Instead of trying to boil the sea (“the market for mobile devices”) - you put the kettle on. Instead of participating in expensive conferences for $ 1,000 for a delegate place, you come to the hotel lobby where they are held and meet the same people for free. Instead of hiring a PR firm, you stick with bloggers and beg them to tell you about your product. Instead of buying an expensive stand at the exhibition, you walk around the market and earn a reputation for your product.

Step 3

You are late with the release of your product (because everything is always done late) - but you do not spend $ 250,000 a month, and you do not have to lie more and more at the shareholders meeting each time. Finally you publish an open beta. TechCrunch suddenly writes about you - because you wrote Mike Arrington one paragraph about your product on Friday afternoon (you found out somewhere that he only reads mail on weekends).

Step 4

A miracle happens here - people like your product. (In fact, miracles also happen when you did something with the money of venture capitalists. It's just that the result is not so shocking for you and the shareholders). You grow by 10-15% per month. Finally, monetization begins.

Step 5

Now you have a choice. First of all, you can talk with venture capitalists about raising money for business development. This is a completely different conversation. A much more interesting conversation for you than when attracting money to create a product. Secondly, you can continue to tighten your belt, and grow on your own cash flow. Thirdly, you can pick up the phone and agree to finally meet with Google, Yahoo, Fox Interactive or any other company that attracted your attention.

Many readers of this article are not IT entrepreneurs, but the merits of Plan B are the same for any business. You can try Plan A until you realize that the hardest work begins afterhow you raised venture capital. With the money of the shareholders, you need to show a much more serious miracle to make everyone happy.

Just believe me - do not leave home without Plan B.

Translation was done on our own. The term entrepreneur in the text is translated as “entrepreneur,” since in my understanding the above applies to any new business.