How to fund your high-tech start-up
Silicon Valley, Silicon Alley, Silicon Beach, and every other high-tech locale in
the country is full of start-ups, founded primarily by people who have left lucrative
positions at larger companies for the thrill of becoming an entrepreneur and the
potential for million-dollar post-IPO rewards.
But there's more to being an entrepreneur than getting a great idea, quitting your
day job, and setting up shop in your garage. You need money, and lots of it.
The four phases of funding
Funding your start-up doesn't start at the venture capital (VC) stage. In fact,
there are as many as three previous steps through which your project will have to go
through before a VC will even look at it.
The full funding cycle looks something like this:
- Back pocket funding. Nobody is going to fund a project unless
you've put everything you have into it first. This is the stage where you put yourself
into hock. If you have a house, mortgage it. If you have credit cards, max them out. If
you have a new Cadillac, sell it and buy a used Dodge. Borrow against any assets you
can get your hands on -- life insurance, retirement accounts, stocks and bonds. Forget
security and forget about saving for your golden years; you have to lay all your chips
on the table. You're an entrepreneur now, and at this stage, you're about one step
below a riverboat gambler. - Friends and family funding. This stage may or may not be fruitful,
depending on what kind of friends and family you have -- but you'll need to make a list
of everyone you can think of, bake some apple pies and go visiting with your hat in
your hand. Even if your brother-in-law won't lend you any money, there's always
possibility that he may know someone who may be interested in your project. - Angel funding. Here's where it gets a little more formal. An
angel is not a venture capitalist, but is typically someone in your industry
with a strong interest in your project. An angel is well-connected, usually a power
broker, and can be very useful to you in your attempts to hook up with the right
people -- including venture capitalists, industry visionaries who you will want on your
board, and seasoned executives who may be looking for a new challenge. In exchange for
an equity position, the angel may also provide initial seed capital, ranging between
tens of thousands up to about a million dollars. - Venture capital funding. Once you have something to show, a
venture capitalist will come in and provide the millions you need. Don't be
intimidated; a venture capitalist is just a regular guy (or gal), probably with the
same interests as you, with a kid in Little League and a power mower in the garage he
uses every other Saturday. The only difference is that he is sitting on hundreds of
millions of dollars in available funds, and you would like to have some of it.
Touched by an angel
Business angels typically don't advertise in
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