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 dollars so that we can focus on development and marketing and not worry about money at all. We will do everything on time and then attract another five million in two years, and sell or go to an IPO. ” In fact, many companies actually attract 1-2 million or even 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 have to prepare for scaling up our solution, and that’s what venture capitalists gave us money for. ”
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Step 3.

Product is late. Everything as usual. In six months, 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 initial projects.

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 heightens expenses in order to prepare for exponential growth. Growth is sure 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 lifelong friends, finally opened up a demo version and three products from other companies that do the same.

Step 6.

Coming out of the dusk, the next day after the shareholders meeting, the main investor calls the entrepreneur on a mobile phone and says: “We somehow do not see how you are going to do all this. We want to organize your company a "soft landing" - 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 put them all to the wind, because my partners think that this is all too long. ”

Step 7.

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

Step 8.

The company is rapidly collapsing. No one wants to buy it, and none of the big guys are not interested. This is a fundamental fact - companies buy, but do not sell. An entrepreneur or investor rarely can call a prospective buyer and make a deal. The entrepreneur simply creates a company - and answers the call of a potential buyer.

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Company sold. The small intellectual or tangible assets that she has left are now valued at $ 1 per dollar of investment. Some money returned to investors. The management has two unrealistic hopes - to buy a company from investors (which, in fact, is not worth the trouble, and management quickly realizes it) or convince shareholders of the presence of social responsibility for business as a living being. Lawyers laughed.

Plan B.

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

Step 1.

Somewhere you dig up / gnaw / tear from the heart $ 100,000 or even less - perhaps with friends and family, perhaps with your colleagues. You do not get paid. You live with your parents and continue to work your full-time job at Microsoft. You hope your spouse will not abandon you, and your pet dog will not die of starvation. You do not have an office, you work remotely, and you meet with your partners in a coffee shop. Everything you use to run your project is free software or shareware.

Step 2.

Instead of trying to boil the sea ("mobile device market") - you put the kettle. Instead of participating in expensive conferences for $ 1000 for a delegate seat, you come to the lobby of the hotel where they go and meet the same people for free. Instead of hiring a PR company, you stick to bloggers and beg them to tell you about your product. Instead of buying an expensive stand at the exhibition, you go about making a fool 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 don’t spend $ 250,000 a month, and you don’t have to lie more and more at the shareholders' meeting every 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 is performed here - people like your product. (Actually, miracles happen even when you did something with the money of venture capitalists. It’s just that the result is not so shocking - you and the shareholders). You grow by 10-15% per month. Monetization finally begins.

Step 5.

Now you have a choice. First, you can talk with venture capitalists about raising money for business development. This is a completely different conversation. Much more interesting conversation for you than when attracting money to create a product. Secondly, you can continue to tighten the 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 has paid attention to you.

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 after you have attracted venture capital. With the money of shareholders you need to show a significantly more serious miracle in order to make everyone happy.

Just believe - do not leave home without Plan B.

Translation is done on its own. The term entrepreneur in the text is translated as "entrepreneur", as in my understanding the above refers to any new business.