Raising Small Amounts of Capital

One of the most frequent questions we get at New Venture Lab is how to raise relatively small amounts of capital. The amount sought from NVL members usually ranges from $25k to $500k. Believe it or not, raising small amounts of capital is actually harder than raising large amounts of capital.

First of all, here is a reading assignment prior to going any further to provide some context on financing in general: Stages of Growth and Capitalization . For the ambitious reader, I would further recommend reading the entire Raising Capital section of blog posts and Q&A posts.

The reason small amounts are more difficult are manifold, but here are a few:
  • Amounts below $5m fall below normal “institutional” fund minimums and the Institutional Equity Financing process, therefore the entrepreneur is left to chase down angel investors, which is a fairly difficult process because they usually do other things for a living rather than getting paid to invest money in startups. Read The Best Angel Investor for my thoughts on how to target this informal crowd. The bottom line is that unless you personally know angels, your likelihood of getting angel capital drops precipitously.
  • Amounts below $5m are usually invested in early-stage businesses that carry much more risk than later-stage, growth investments. Investors like to invest in growth, not concepts. And nobody, but nobody wants to invest to simply pay your salary while you get something off of the ground. In other words, completely prove your business model first and then go looking for a growth investment.
  • Amounts below $100k usually means the entrepreneur is not investing very much themselves or is perhaps a first-time entrepreneur with limited resources, which considerably raises the risk profile with little skin in the game coupled with little experience. The more new things the entrepreneur is experiencing while attempting to launch a new venture, the greater the risk and the higher the likelihood of failure.
While many are excited about crowd funding, I am not a fan. Please see I'm Not Convinced That Crowd Funding Works for Startups for my reasoning. 

Here are some tips on raising small amounts from a Q&A post: Raising Seed Capital for a Healthcare Products Company

The bottom line is that you should get really creative rather than just trying to raise money: change your business model; get customers to prepay; license, partner, or outsource to gain capability rather than build from scratch; etc. In fact, the more creative you are -- the more you build a company with few resources -- the more irresistible you will be to investors because they can see the entrepreneur in you.

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