Want to Raise Capital? Perhaps Skip the VC and Go Retail Instead?
Sven Milder
July 09, 2023
Reading Time: Approximately 6 Minutes
Want to Raise Capital? Perhaps Skip the VC & Go Retail Instead?
Founders raise capital from investors to grow their businesses. The industry news portals and blogs want us founders to believe that angels or VC’s are the go-to options.
Most of the time It goes something like this:
“When you kick off your business, you approach angels”
“When you grow your business, you connect with VCs”In today’s newsletter, I want to teach you a more contrarian approach that I believe you should consider to increase your success dramatically.
So you close FAST, SMART and yes have an exit.
1. Why do founders start a business in the first place and what goals they should have?
2. Why accepting venture capital may set you up for failure?
3. Why retail investors may be a better option for founders?
4. Money = money. The terms and opportunities are what make the big difference?
5 How to approach and structure your fundraising?
🔔 Limited
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It’s my goal that by the end of today's newsletter, you will be able to make your own informed decision.
For the non-readers, listen to the full newsletter on FoundersTribe.
⚡️ Why do founders start a business in the first place and what are their goals?
It sounds like an obvious question, but drop your phone at this moment and ask yourself: Why am I a founder?
Your answer will likely be:
👉🏻 I’m a founder because I want to make my own decisions.
👉🏻I am a founder because I want to have an impact.
👉🏻I am a founder because I want to be acknowledged by my friends and family.
Does this cover it? Am I right? No?
Oh yeah, money.
"Founders start businesses because they want to unlock the corporate world and become financially independent with the purpose of living life to the fullest. No limitations."
Sven Mider
And if it's not just money, then it's very likely a combination of money and one of your former answers.
Now stick with me for a moment, because we will get into it...
⚡️ Why accepting venture capital may set you up for failure?
To understand why accepting venture capital may set you up for failure, you need to understand the VC model first.
🎯 VC is an investment fund managed by a general partner, funded by limited partners who allocate between 5-10% of their wealth, expecting massive returns.
🎯 VC is an alternative asset class for high-net-worth individuals (HNW), pension funds, and family offices targeted to generate exponential returns that need to outperform bonds, stocks, and real estate by a factor of 10 times per year minimum.
🎯 VCs generate these returns by betting on high-growth companies (minimum 20% growth per month) with the obligation to IPO or sell them within 7 years (the fund life).
🎯VCs make on average 10-20 investments per year based on a pipeline of 3600 opportunities per year.
🎯VCs invest on average $250k - $1,000k per investment in early-stage rounds.
🎯 General partners are wildly incentivized to maximize returns, hence their term sheets are wrapped with terms and clauses that, in the event of failure, protect their loss, not yours
"Raising from VCs is a potential vehicle for massive business growth as long as you fit the bill."
Sven Milder
But it does come with loads of governance, killer terms, and high expectations of growth, hence the lofty valuations that are set for early-stage businesses that easily exceed millions in the early stage.
But what if you don’t match the speed of growth?
But what if you don’t perform?
⚡️ What if your business doesn’t have traction?
Of course, we all want a massive exit, but more often than not, it means:
Option 1:
Your business needs to close its doors.
Option 2:
Your business gets acquired for an amount that's not big enough to pay you and your co-founders a fair share.
This means that your time, effort, and energy have not paid off. Now, don’t get me wrong; that risk is always there.
But there could be a better way if you want to keep all options open.
⚡️ Why retail investors are (in my opinion) a better alternative for founders.
A retail investor, a business angel, is an individual with substantial additional income. Often a successful (former) entrepreneur or an ultra-high earner who has built wealth and wants to increase it by investing in businesses and, where possible, even mentor them.
To understand why retail investors may work out perfectly for early-stage businesses, let's go through some points together:
👉🏻 Retail investors, or angels are individuals who invest anywhere from $5k to $1,000k in your business.
👉🏻 Think entrepreneurs, CEOs, lawyers, doctors, accountants.
👉🏻Mostly, they are equipped with a network of like-minded professionals who get excited to co-invest in your round.
👉🏻 They are able to make decisions fast, in a matter of 3-4 weeks compared to VCs who may take 3-5 months.
👉🏻They are not governed and mostly accepting reasonable terms.
👉🏻 Their expected returns are lower and more in the 3-5x range in years 4/5.
👉🏻 They seek exits when the returns make sense and there is an option for a liquidity event.
👉🏻 They are able to activate their network, open doors, and mentor you on weaknesses and strengths.
Before jumping to my final conclusion, let's touch on one other topic.
⚡️ All money is similar, but we categorize it into 3 types of capital:
💰 Smart Capital:
Capital that delivers value beyond its factual value through introductions, partnerships, mentorship, insights, and expertise.
💰 Social Capital:
Non-monetary support without currency involved, giving access to people, capital, and collaborations
💰 Dumb Capital:
Capital handed to you, without any extra benefit or perk. Just cash and hopefully on good terms.
⚡️ What Investor should you work with? How to structure your raise?
"Raising capital from investors can be a game changer to grow your business. But selecting the right type of investors can be the difference to make or break your business.
Sven Milder
⚡️ The point I am making today.
Venture capital is great, but leverage it only when your business is profitable or reaching profitability. Then it will give you the capital against your terms. Ready to catapult.
In your early stage of business. Let's say up to US$ 2 million, work with angels only, allowing you to leverage smart capital.
As the future (VC) value of your business has not yet been proven, you’ll be able to keep options open to sell the business if you want against a 3-8x multiple, instead of closing it down and still make tons of money.
You can accept smaller tickets representing smart and social capital giving you lots of options
"Skip the VC For as Long You Can. You’ll find in business angels and investors an army of advisors that can catapult your business. So bring them on your Cap Table. You’ll likely get faster traction and trust as you close and have access faster"
Sven Milder
Angels can cash out, whenever they want, by selling their shares within the group of 20-30 angels.
If you wonder how to structure a round like this, keep an eye on next week's newsletter where I will share all about SPV aka Special Purpose Vehicle.
⚡️ Limited Invitation For only 20 Early Stage Founders.
As you guys know I'm bullish about funding, acquisitions and venture flips.
Normally I work just one-on-one with founders to help them raise and close.
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Thanks for your attention.
Cheers -!- Sven
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