Don’t Pitch VCs Too Early

Posted by: DJ Burdick on: January 18, 2009

In: Raising Money| Startup Articles
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The secret to raising venture capital is (drum roll…):

Build a compelling product that has a ton of people using it.

Right now you’re probably saying: “thanks for the advice jackass.”

The point I want to make with this post is that, unless you’re a “name brand” entrepreneur (someone who has already had a big success), pitching VCs before you have traction and a live product is a waste of time. Some businesses, like the hardware industry, require more capital to just get a working demo; but the internet industry, for the most part, requires little to no capital to start a business.

We spent a lot of time pitching VCs before OneSeason was launched. We flew to meetings and talked to people all over the country about a year before we even launched. It was a good learning experience, but definitely detracted from building the business.

What is the money for?
You need to get creative and look at what you plan to spend the money on. Most early startup expenses can either be deferred or replaced with equity.

Employees – instead of hiring, get an initial team together of partners who can build the first product version and all share equity. You should have partners when starting a company anyway as it is invaluable to have other founders that you trust.

Marketing – you should be able to get a decent amount of traction by marketing the product yourself, through your network and other online destinations. If you aren’t getting traction, then maybe what you’ve built isn’t that compelling. You may need to change direction. You will flesh things out this way without wasting money on marketing. You could easily spend $1MM a month on marketing and get no traction if you’re product or concept sucks.

Legal – you can setup a simple pre-formation agreement between the first initial equity partners; this pushes the costs of setting up an LLC or C-corp further down the road. You can get started with that agreement, and then, as things progress, form a real entity. Form contract sites like Legal Zoom provide a cheap alternative as well. You should be able to cover the legal expenses with money from friends and family or using a credit card (be careful) or your savings.

Office – work from home

Web Hosting – this should be very cheap if you don’t have much traffic. Less than $100 per month.

Eating and living – Raise some angel money from friends and family or use a credit card or your savings.

Once you have a live product and some users who are passionate about your product, then you can feel confident that you aren’t just wasting your time with the venture guys. Ideally, you should strive to keep running your business until the VC guys start calling on you. The balance of power will have shifted back to your side and at that point, you can get a deal done that you want. The industry tends to have an inordinate amount of hype around it. Remember that there are just as many positives as there are negatives with taking investment capital; don’t think that it is the be all end all. Raising a venture round does NOT mean that you have built a great company.

The bottom line is: Focus on your company, make it great and the money will come.

I’ll write more specifics about the industry, pitching, angel investors and managing your capital in future posts.