Ask an MBA: Raising Money for Your Business (Pt. 1)

money

I want to raise money for my company. Any insight?

- Francis D.


If you read (What It's Like To) Start a Business you know it’s hard to get past the idea/infatuation stage.

And once you do, you’ll find your new venture is a self-funded money pit. 

That’s why you try to get as much OPM as possible.  

That’s “other people’s money”. And unless your brilliant idea is already making you a ton o’ cash (or has off-the-charts user growth), it’s pretty damn hard to coax the M from the OP.

Raising money for a new venture is like being an unknown actor. You go on loads of casting calls and deal with a ton of rejection. But you stay the course, pushing for that big break you hope is near, because this is all you want to do.

For my first business, one of my partners randomly announced he knew someone who was looking to invest in digital startups. Although we had worked on our idea for months, we barely had a webpage, let alone a pitch.

And we had one day to prepare for the meeting.

All we had was enthusiasm, and that we all came from the very business -- music -- we were now trying to disrupt. I finally would finally learn what the term “flying by the seat of your pants” meant.

And this is where a famous rapper came into the story.

On our way to the meeting, we passed a newsstand and saw an issue of Rolling Stone with Eminem on the cover. And right there, I knew I had a magic bullet.

We had a digital music startup but none of the major labels were licensing out their music yet (this was a little before the iTunes store). But we did have tracks from some indie labels, including a small hip hop label which had the rights to some early Eminem jams (i.e. before he was a star).

So there we were, meeting with a bunch of rich investors, and they asked one simple question:

Why should we give you our money?

I held up the issue of Rolling Stone and boldly said:

Because we have music from THIS guy. No other digital platform has any superstar artists yet.

And the lead investor slammed his palm down on the table and said:

This is a home run! How much do you need?

[Ok, I bent the truth. We didn’t have any hit tracks. But what’s a business without a little hype?]

And I was completely unprepared for his reaction. So I spit out, half-confidently:

Um, we could do this for $2 million.

They nodded in approval.

Wow, that was EASY! Yeah, not quite.

Our idea genuinely excited them. But then they said some things that didn’t make sense to us.

Things like:

We’re gonna f*ck you on the first round.

and

You’ll have to do a road show to pick up the big money.

None of us had any idea what the hell they meant. We were a bunch of kids with no financial experience whatsoever. All I said was, “Great, send us a contract.” and hope we’d figure it out.

They agreed to invest $125,000 for a 25% equity stake in the company. That money was the "first round" they mentioned (aka seed money). The 25% was the “f*ck you” part.

Hey, at least they were honest about it.

The “pick up the rest” part was more complicated. They had a network of contacts across the country for us to meet and pitch to get the $2 million in the second round of financing. Now we needed a business plan and a hell of a lot more than a magazine cover.

 

Coming Soon: Part 2

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 ask an mba

 

 

John Lavallo57 Posts

John is Columbia Business School MBA with expertise in marketing, business leadership, and law. John is a successful entrepreneur who took his first company public. He currently resides in New York City.