How to raise $5million for your startup idea (and why you shouldn't)

(or "Venture Investing 101" for Founders)

I know about 20 people on the planet who could write me a $5million check tomorrow to fund my next (or last, or current) venture. And who care enough about my success, that they might. But they won't. Or rather, they shouldn't.

Start-up ventures can be tough. And there's a lot of conflicting advice 'out there', often from people who've never done it. Which creates a lot of false perceptions about how the venture investment space operates, especially for first-time founders.

I meet & hear from many aspiring founders every week, who almost always say the same story "If I could just raise $100,000/ $1M/ $5m for my venture, I could build my 'great venture' and change the world". This song is repeated time after time in conversations, in emails, and over face-to-face coffees, time and again.

And I always give the same guidance; "Unless you are a special sort of person, you just won't get that sort of funding- only the best 1% get seed funding- the rest just won't". And at each & every subsequent funding stage, another 80% drop off that short list.

I'm sorry to burst your bubble, but I'd rather tell you a harsh truth that helps you, rather than a lie that hurts you, but makes you feel good. So, probably, neither will you.How do I know this? Because to 'change the world', does not require money. It requires you to become the sort of person to whom money becomes an irrelevant requirement in changing the world. And then the money required to 'change the world' flows as a natural by-product of becoming that person.

So why do you think that you need all the money required to build your venture now, upfront? When you were a kid, did you sit down to an evening meal with the family, with a huge feast laid out before you?  I hope not. If you are a normal person, and not some sort of "Ritchie Rich", of course you didn't. I hope your mum & dad didn't say this to. "We love you so much and want you to grow up so big and strong, that we've cooked all your meals for the next 6 months" and put them all out in front of you, ready to eat. Of course they didn't - that would be wasteful, irresponsible, and stupid.

You don't really need it all now, do you? What you might need just enough money for now. Enough for the next stage, the next hurdle,the next proof-point, the next milestone on the path to proving that your venture is both valuable and needed. And a path to funding the next stage.

So let me show you how to secure it.

Let me start from the perspective of venture investors (of which I am one), and then give you a clear path to help you.Let's first look at it like would if you were a bank. Banks don't loan money to people who need money; they typically loan money to people who don't need it, and can demonstrate the savings and earnings history that makes them a low risk in ensuring that the loan is likely to be repaid.

We might often not like the behaviour of banks at certain times in the business cycle, but they perform a necessary function. They lend to people, with upfront fees (the cost of 'hiring' the money), with an interest rate attached (the cost of 'renting' the money), and requirements around repayment of the capital (often backed by securitisation, such as a mortgage).

The same is true of venture investment.

Investors don't invest in people who need money; they invest in people who don't need the money, but for whom have demonstrated the capacity and metrics needed to test, model, iterate, and scale (grow) a venture. And that by using investors' money,  these founders, with this money, would generate a substantially greater return than the founders would achieve without it. Thereby demonstrating a better chance of securing a good return on investment for potential investors.

A wise and successful investor and mentor friend of mine, Jordan Green, describes investing as "all philanthropy, until you get a return". But venture investing is not UNICEF. Every investor wants a return, and in fact MUST receive returns on their investments. And the returns must be substantial, in order to a) make up for the (often substantial) capital losses for the investments in their portfolio that have -or will- fail, and b) continue investing in other further ventures. Just like a bank does.

Unlike a bank, a venture investor doesn't get similar fees, charges & security (not upfront, at least). They generally don't charge you an upfront fee to setup, ongoing interest payments, or securitise their investment through your physical assets (though any or all of these might be built in to an agreement).

I might also make another distinction about "smart -money" (which is often the best form of investor funds). When you loan funds from a bank, they don't also work in your business (for free) to help improve the odds or likelihood of your success. (And given the track-record of some banks, you wouldn't want them to).

But a venture investor often will (though some might charge). A venture investor wants you to succeed. But they can't make you into the person that you must become, in order to succeed- they can only guide you, and help you to ask better questions, which lead you the right answers. The responsibility is still on you to get the job done.So in order to secure a venture investor, you must demonstrate (like - but not in the same way- you would to a bank) that:-

1.  you don't need their money, and
2. that they have a better than even chance of getting repaid (e.g. because you are generating customers & income).

As they are not taking backing security (though they might make up for that in 'preferences'), whether they invest often will then ultimately comes down to whether (in their eyes) you can execute on the vision you've laid out.

Let's get to how this can help you.Here's what I've learned about building ventures, from 15X doing it, from mentors, and from venture investing.

You build a venture, like you build a brick wall. You start with a good plan, a survey, the raw materials (or access to them) and some basic skills and know-how, some formwork from which you create a solid foundation, and a little common sense. And once you've built your foundation, then you start at the bottom (not the top), laying one brick at a time, checking for straightness as you go. You might be solo, or bring in other bricklayers, you might be faster or slower, and you might be neat or messy. And the more that you do it, the better you get doing it. Building walls takes time -that's the way it's done. By craftsmen and artisans, tradesmen and labourers, people of stations high and low.

That's the same way every great wall, throughout the history of man, which still stands the test of time, has always been built. But instead, (without ever having built a wall before), you are planning on bringing in a big engineering company to design, build and haul into place, great slabs of preformed concrete? And you want someone else to fund that venture?To take the risk of it falling over? Of falling on some-one? Who in their right mind would do that?

I put out a blog post 5-part series a few weeks ago about how to micro-fund your startup idea' , followed by Why pitching to a VC will almost always fail (which got quite a few views and shares on Linked In. You might call it 'Lean-Funding' your venture. I call it being 'Creatively Resourceful'. In that series, I lay out the steps that you need to take to fund 'laying one brick at a time', from idea to completion, to build your wall, culminating in a simple one-page roadmap to raising that $5 million. And contrary to what you might have heard or read, there's no easy shortcuts in this approach. There is just 'What Works'.

The reality of this approach is that it works.

When you build a wall, suddenly, everyone can start to see what the building might look like; they can start to see your vision as being tangible, real and solid. And they start to get trust and confidence that you have a skills and capacity to complete the building. Which makes it easier for them to invest in you, at terms that are going to not only give them a fair return on their investment, but also give you the same outcome - a fair return.

Suddenly, when you reach this point, you won't need to pitch to investors, because they can see for themselves, and they will seek you out.

This is not a 'build it and they will come' approach - this is a "see what I've already done; let's finish the rest together" strategy. And this works.So give them a fighting chance to invest in you. Instead of pitching your 'wall', go and and start building it, and become the person that can just 'share the vision', which attracts partners, customers, fans, followers, referrers, advisors, mentors (and bricklayers) and you'll have all the investors you need.

"To Your Success", Daniel

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About Daniel

I'm a founder, mentor, advisor, investor, venture catalyst, accelerator, and venture capitalist. Also traveling under the alias of 'That Startup Guy', I am a co-founder of StartUp Foundation (The Startup Accelerator for Experienced Professionals) and am intensely, deeply, passionately dedicated to "The intersection between personal mastery & business entrepreneurship".

My goal is to help you, by guiding you through the steps, and past the challenges and pitfalls, to turn that 'Great Idea' into reality, whether it's a business, service, product, or to disrupt an entire market.

And if you've got an experience about startup success (or failure), comment about it. If you've got a question, reach out to me via your preferred social media, or download my media/speakers kit. Other posts can be found here on Linkedin.