A panel at the second annual Columbus Startup Week featured some heavy hitters in the local funding community dispensing some frank, and at times surprising, advice about when a business should seek outside capital.
Offering insights were:
- Parker MacDonell – Managing Director, Ohio TechAngel Fund at Rev1 Ventures
- Falon Donohue – Executive Director of Venture Ohio
- Rich Langdale – Partner at NCT Ventures
What’s the difference?
While angel investors and venture capitalists both provide capital to startups, the stages and types of businesses in which they invest tend to differ.
MacDonell says angels come in at the concept or seed stage – Rev1’s sweet spot for its programming. Venture Capital is more high-risk, high-reward aimed at startups with huge growth potential. Langdale and NCT have a rule for what that threshold is (and it involves already having customers), but more on that later.
When to approach.
Many entrepreneurs get excited about their ideas (and they should be – passion plays a big role in this process) and assume they should talk to investors right away, but as the panelists revealed, talking to funders should be pretty far down on the list.
“If you have a choice between talking to a potential customer or talking to an angel investor…you should talk first to a potential customer,” MacDonell says.
Without customers there is no product, no business. Rev1’s Concept Academy serves to help startups first validate their ideas before seeking funding. The academy also provides a pipeline of the seed stage companies in which Rev1 primarily invests.
Langdale says to never approach a venture capitalist, especially in a business’ early days. He and Donohue both recommend bootstrapping and riding that wave as far as possible.
“As an entrepreneur just getting started, I encourage you first to go the friends and family route,” Donohue says. “You want to get as far as you can and bootstrap your company before you take on those investors. The more investors you have involved, the less equity that you will own in your company and the more voices that you have at the table.”
“When a venture capitalist may make sense is when you get to a point where you have a dynamic growth opportunity ahead of you…and there is a sense of urgency,” Lagndale adds.
Even then, if there is no other competitors in a business’ space, he recommends a business just keep growing on their own. Keep all the equity and keep all the money.
A firm like NCT Ventures looks for traction in the form of about $1 million in sales and at least 10 customers before they will invest. Looking at firms on the coast, Langdale says that figure jumps to $5 million.
Those high sales figures aren’t going to be every business.
“Venture capitalists are not putting money in your business because they only enjoy your business…they are putting money in your business to get 10 times that money out,” Langdale says.
And they want it in four to five years. If that’s not in a business’ plan or goals, he once again recommends to not take money.
How to Approach.
Both Langdale and MacDonell can’t stress enough the importance of finding an angel or venture capitalist that’s a good fit.
“The idea of approaching a venture capitalist is a lot like matchmaking,” Langdale says. “You need to find the venture capitalist that invests in your stage of business, your type of company, and maybe your geography might be important to them.”
He says businesses hear a lot of unnecessary ‘no’s’ because some firms just aren’t going to put dollars in certain industries.
MacDonell explains that taking capital from an angel investor of venture firm isn’t just about money.
“The mistake that I see is that people come to us and they don’t want our advice or our experience,” he says. “Angels do want to put money into your companies, but what we really want is to help you succeed, and we want to do that not just by investing money in your company, but trying to help you with your idea and shape your idea through our experience.”
As for the pitch itself, Langdale says don’t wait until too far in to really drive home the business model. Perhaps some revolutionary technology is involved, which is exciting, but investors want to hear about more than that – here’s the market, here’s how the business plans to reach it, here’s proof it’s reaching it today.
And a business owner needs to present with some pizazz.
“When you come in, we want to feel your passion,” Langdale says. “We want to feel why you started this business.”
If the business model and the passion aren’t there, it’s not time to approach.
There’s always going to be someone smarter, or with more money, or a similar idea, but Langdale says it all comes down to passion. The person that will come out on top is the person with the most passion.
Investing in Ohio.
“This is a really good time to be looking for money for your startup company in Ohio,” MacDonell says, noting this is not a statement he could have made at this time last year.
Donohue says organizations like Ohio Third Frontier have been working for over a decade to infuse capital into Ohio. In the last few months, the state has seen an influx of $200 million between the Ohio Third Frontier and private investments. Other established venture capital firms are also raising more funds.
“In terms of venture capital things are going really well,” Donohue says. “Ohio boasts three of the top angel funds in the entire country.”
She speaks to a state level, noting that if a business can’t find money in Columbus, growing startup scenes in Cincinnati and Cleveland might have something to offer.