We may or may not be the world, but as entrepreneurs we are surely what we can finance.  That line is one I’ve used often when discussing strategy in the start-up or early stage of a company.  A respected founder who has already punched his or her ticket in a successful Valley-based exit of $100M+ can dream big dreams and will probably have little difficulty raising all the money needed to pursue those dreams.   A first-time entrepreneur in Thomasville, GA, will likely have to bootstrap to profitability and relocate to a money center that is relevant to the chosen business (unless it's a quail hunting innovation).

Last week’s 1SS class featured Kip McClanahan of Silverton Partners answering a series of questions covering the gamut of fundraising.   There was discussion about raising as little money as you can in the beginning and allowing your value to grow as you begin to prove your model.  It’s hard to argue that as a general rule, but I can name many successful ventures that took a different approach.  Raising a whole lot of money can create barriers to entry and sheer marketing force when technology alone isn’t the answer (Groupon), can enable one to quietly roll-up all the valuable pieces of a fragmented market (HomeAway), and can allow one to tackle the hard science of major problems that can’t be solved by a weekend’s work on a minimally viable app (Joulex).

Deciding how much to raise in a seed or A round is never easy.   You don’t want to bet against yourself by taking all you can get prematurely when your valuation is likely to go much higher, but, on the other hand, you don’t want to be constantly fundraising as you find yourself jumping from one “fume” stage to the next (Bob Metcalfe term).   I advised one entrepreneur last week that he was raising too little money to be convincing in his chosen market.   Whether he could get the job done with less was overshadowed by the psychological effect of looking like a serious player.  And, investors often find some comfort in knowing that their money is surrounding by enough in the aggregate to give the business more than a fighting chance.

When I left Peachtree Software just a few decades ago (hurts to say that), I was able to attract to Atlanta Pat Welsh of the famous Welsh, Carson, Anderson & Stowe firm from NYC.   On his first visit I showed him a working prototype of one of the earliest interactive multimedia systems, the beginnings of a strong team, and a plan that was convincing enough.  He admitted at the time that he was surprised by how much we had accomplished, and we got a check.  My timing was good on that deal in two ways:  (1) WCAS started in 1979, invested with me in 1984, and then scaled incredibly fast; their investment in that deal, Comsell, became somewhat of a rounding error and would never have made the cut just a couple of years later.  (2) When the stock market crashed in 1987, we had a ready buyer at hand – Rupert Murdoch’s NewsCorp – and WCAS and our other investors were happy to exit the Comsell deal unscathed.   So, the art of the possible depends on catching investors at the right times in their own lifecycles, as in this example when they have dry powder but not so much that your request is irrelevant.

Austin's S3 Ventures website is up front with the questions:  Why you? Why now?  I would add a third to that:  Why here?  What you can finance is a function of all three.   As noted in many previous posts, there are differences in deals that are of interest to investors in Atlanta, Austin, San Francisco, or any other city you may pick.  Each has its own leanings, and the relative amounts of money available vary dramatically.  At a seed or early stage you generally have to be “here” – wherever that is – before you can expect local investors to respond positively.   Sophisticated investors at this level generally want their money deployed close to home, and you have to get to know people, become part of the fabric, and have your business be physically resident in a city to qualify.  Texas money rarely leaves Texas, except occasionally for California opportunities that help keep Texas investors in the mainstream deal flow.  I’m already involved in one venture that we are relocating from the Deep South to Austin because it is a natural fit for this city in many ways – its particular technology focus and the proximity to strategic partners and high-value-add investors.  If this business were taken to California, it might play out a very different strategy than what is appropriate in Austin.   If it stayed in its place of origin, it would have a very difficult time achieving any of its real potential.

So, if you abide by the “we are what we can finance” theory, you have to take into consideration how marketable you are as an entrepreneur, why this is the right moment for your idea, and where you are going to plant your flag.   And, even with all those aspects carefully considered, you’ve still got to find the right match with an investor group that may be thinking “we are what we invest in” and be asking its own tough questions about whether your deal is optimal for its objectives.

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