Venture Capital

Y Combinator- Finance or Folly?

Capital Markets, equity crowdfunding, Investors , ,
y combinator-finance or folly

Y Combinator (YC) is a Silicon Valley-based school for startups. They provide an 11-week course for founders. The program does not accept everyone. There is an application and interview process. They start with the group of founders that they think they can help the most.

YC’s goal is to help these startups take off. It boasts that every startup is in dramatically better shape after taking its 3-month course. For most startups, better shape translates into two things: to have a better product with more users and to have more options for raising money.

Founders who are in the program receive advice and ongoing support from each other, successful founders, and YC alumni. There is a lot of one-on-one counseling. YC even provides introductions to potential customers and investors.

Most importantly, YC makes a $500,000 investment in every company. The $500K investment is made on 2 separate “simple agreements for future equity[1]” or what they call SAFEs: YC invests $125,000 on a post-money safe in return for 7% of your company (the “$125k SAFE”) and then invests $375,000 on an uncapped SAFE with a Most Favored Nation (“MFN”) provision (the “MFN SAFE”).

Given that each company is vetted before it enters the program, each given specific advice about its product, a lot of general advice and hand-holding, introductions to customers and investors, and a $500,000 initial investment,  I think it fair to say that these companies might have a better chance of success than those who do not enter the program.

YC boasts its strong track record, but I question how strong. If the average success rate for startups is only one of ten, I would expect YC to be boasting that a much larger percentage of companies that complete their program are profitable three or five years later. If three out of ten of the companies that went through their program survived and prospered, I would think that YC would have published that result and boasted about it. But they do not.

Instead, YC falls back on valuations these companies achieve. It claims that the four thousand companies that have completed its program have achieved combined valuations equal to $600 billion.

These valuations are meaningless. They are just part of the venture capital circle jerk that says that a company is worth what I say its worth, because I’m a VC and you are not. 

I recently reviewed a copy of the Y Combinator Guide to Seed Fundraising Every Founder Needs to Read. The Guide is specifically aimed at start-ups seeking capital from VCs and angel investors. At first blush that may seem like a lot of businesses trying to get off the ground. The Guide is actually targeted at a very limited and specific group of companies. So limited, in fact, the suggestion that every founder should read this Guide is a farce.

At best, the Guide might be useful for companies founded by some Silicon Valley software developers. Unfortunately, the Guide is so inaccurate that it has no value to anyone. These are some of the topics that the Guide covers:

What is a Startup anyway?

In YC’s world a“startup” means a company that is built to grow fast”. How fast? The Guide suggests that a “rate of 10% per week for several weeks is impressive. And to raise money founders need to impress.”

Any business whose sales double every 2 months is impressive, but if that is what YC is looking for, you will rarely find one among the thousands of companies at conferences or pitch competitions that VCs sponsor or attend.  If that type of sales growth was a requirement for VC funding, those conferences would sell very few tickets.

A company with that type of growth would be more likely to either manage its cash flow to self fund. Alternatively, it might turn to a factor or secondary commercial lender to keep its cash flowing. 

The Guide notes that right now there are lots of investors hoping to give the right startup money. That statement is true. There is a lot more investment capital available for new businesses than ever before.

Then the Guide goes completely off the rails.

The Guide says: “Fundraising is brutal. The process of raising that money is often long, arduous, complex, and ego-deflating. “

Actually, fundraising has never been easier. Imagine trying to raise funds for your business in the days before e-mail, Excel and Zoom. Those technologies, together with the JOBS Act, have made equity crowdfunding the most efficient and effective way for any company to raise capital. Instead of pitching to a handful of VCs a month, a well-executed crowdfunding campaign can reach thousands of targeted, potential investors per week.

The Guide mentions crowdfunding but essentially dismisses it.  It suggests that crowdfunding might be a tool for fundraising “in exceptional cases”.  The Guide refers to Kickstarter and Wefunder as examples of crowdfunding platforms. Neither of those platforms have anything to do with serious finance. 

What YC actually does, introduce companies to investors, is a form of crowdfunding because it is a direct to investor sale of securities. YC apparently does not understand that. It suffers from Silicon Valley myopia. It refuses to see the bigger picture or see fundraising in the proper context.

How Much Money to Raise?

The Guide suggests that every company raise enough capital to sustain itself until it reaches profitability. That is certainly good advice but YC quickly shows why it cannot seem to grasp startup investing from the investors’ point of view.  Investors want to know not only how much you will need to spend to become profitable, but how you intend to spend it.

As an example of how much a startup may need to raise, YC offers the following calculation:

“A rule of thumb is that an engineer (the most common early employee for Silicon Valley startups) costs all-in about $15k per month. So, if you would like to be funded for 18 months of operations with an average of five engineers, then you will need about 15k x 5 x 18 = $1.35mm.”

Put aside for a moment the fact that most new companies outside of Silicon Valley need no software engineers at all. If you are funding your business from investors, you owe it to investors to use their money intelligently. If you really need five software engineers you can find very talented ones for less money in Boston, Austin or Atlanta. Many of the largest tech companies employ engineers in Europe, Asia, or Latin America at a fraction of what they would pay in Sunnyvale. 

If you want your company to be among the one in ten that succeeds, why would you pay more for engineers than you need to spend?  For that matter why would you locate your company in Silicon Valley and pay exorbitant rent unless you absolutely had to do so?

How you will use the proceeds of your offering is something that the SEC expects you to disclose. Investors would want to know if you were using their money to take a long executive retreat in the Bahamas.

Investors want to know not only how you will spend their money but also how you will turn their money into a profitable business. Remarkably, YC leaves that fact out of its recommended pitch.

The Pitch

The Guide goes on to suggest that a perfect pitch tells investors how you will solve some painful problem for an enormous number of customers in a billion-dollar market. Unless you are looking for funding to start a new cartel to sell cocaine to Silicon Valley VCs, few companies fit this business model.

Silicon Valley exploits a fictitious unicorn mentality. Win very big or go home. It has become a cult of personality, worshiping successful founders who cashed out, believing that they have found the “secret to success”.

Most startups are happy to raise between $1-$2 million. Most investors are satisfied with ROI delivered in the form of passive income. They are not looking for pie in the sky.

SAFEs

YC will be remembered for its development and advocacy of the use of the SAFE. It is an agreement between an investor and the company that provides rights to the investor for future equity in the company.The Guide notes that “a safe acts like convertible debt without the interest rate, maturity, and repayment requirement.”

With that many unknown factors, a safe is a derivative because its value derives from a future event, another round of funding. Because that event may never happen purchasing a safe always increases the risk that each investor is taking. Because the risk is higher, so too must be each investor’s reward.  In the case of a safe the reward is equity in the company.

Perhaps the biggest mistake any company can make is giving away to much equity, too cheap.  That is exactly what a safe does. That is why using a safe YC can get 7% of your business for $125,000.

The fact is that most investors, including wealthy investors and family offices, have never purchased a safe. In addition to convincing those investors that your company is worthy of their investment, you will have to convince them that offering them a safe was the best way for them to invest. 

The key question that needs to be answered about any safe is what your company will be worth when it does its next round of financing, the round where the shares purchased with the safe are priced. YC always has a good answer for that because when the time comes, they will just advise you to assign any value you choose to your company.

What is your company worth?

In its Guide, YC says that “it should be obvious that no formula will give you an answer” to the valuation question. .Actually, there are quite a few formulas that are used daily by business brokers and appraisers to value any business. These formulas are readily accepted in the marketplace but do not fit into YC’s narrative.

For decades, startups were funded without any valuation assigned to them. As YC notes, “there can only be the most notional sort of justification for any value at all.” So why assign a value these companies in the first place?

Whenever a company issues new shares the value of those shares is diluted by the value of the existing shares. While this dilution is always disclosed to investors, it is contrary to the idea that additional capital adds to the value of the company. If more capital adds anything to a company it is potential, an item that never shows up on any balance sheet.

If you look at it objectively YC’s valuations are just a lot of hot air. So too, is their promise to turn your company into a billion dollar enterprise in 11 weeks.

YC beats the drum in the fairyland that Silicon Valley has become. Far from the innovative hub of the internet it once was, Silicon Valley is now the home of a generation of young people with worthless degrees and enormous amounts of student debt.

If you look at YC’s website, they make it seem easy. Enroll in their program. Attend their classes. Accept their money. Become a billionaire by Christmas.

Don’t step in the unicorn poop on your way out.

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Satoshi was a Copycat and Maybe a Criminal

Capital Markets, Investors, Technology ,
Satoshi was a Copycat

When I started looking at bitcoins and cryptocurrency in 2015 I was already 65 years old.  Many of the early adopters and proponents of bitcoins were in their 20s and 30s.  Even today most BTC enthusiasts are shocked when I tell them that there was a popular digital currency a decade before Satoshi wrote his famous paper.

In 1999, at the tail end of the dotcom era, two aspiring entrepreneurs named Spencer Waxman and Robert Levitan launched a digital currency called flooz through their website called Flooz.com.  They promised that flooz would disrupt the new online retail industry and become the preferred medium of exchange for shoppers and merchants worldwide.

Flooz was backed by a lot of VC investors to the tune of $35 million. It had a celebrity spokesperson, Whoopi Goldberg, who appeared in radio and TV ads and in newspapers and magazines. Her face adorned the sides of NY transit buses, hawking flooz as the future of currency. Does any of this sound familiar?

A significant number of retail customers loved the whole idea. More than 125,000 new accounts were opened in the first 90 days.  In the first 12 months, roughly $25 million in flooz currency was purchased and used.

Flooz customers would sign up to Flooz.com. They would purchase flooz certificates for specific retailers, which they could then use themselves or pass along to a gift recipient via email. Because the flooz certificates did not fluctuate in value no one ever thought that these were securities or that they needed to be regulated in any way.

This helped the retailers build traffic in the new internet marketplace and a variety of names you would know signed up. You could buy chocolates from Godiva, cookies from Mrs. Fields, and clothing from J. Crew. Tower Records, Barnes and Noble and Starbucks signed on. You could buy Swiss Army knives, all kinds of delicacies to eat, and cigars to smoke.

There was an expanding group of retailers and continuing adoption by a fast-growing customer base. Notwithstanding the company filed for bankruptcy and went out of business within 2 years.

Business school students spend hours poring over the case studies of businesses that succeed and an equal time studying businesses that failed. The dot-com era gave us plenty of both.

The dot-com era, for those of you who were not there, was a heady time when arrogant VCs tried to put lipstick on every pig of a company that came along as long as the company’s business plan included the “internet”. If you replace the word “Internet” in that last sentence” with “blockchain” or “crypto” the similarities to what is occurring in the marketplace today will become obvious.

One of the great failures of the dotcom era was a company called Pets.com.  Its business model, selling pet food and pet supplies directly to consumers made a lot of common sense. Consumers spend a lot of money in this market every year. People who purchase pet food are usually repeating customers, month to month.  

There is also the fact that home delivery of a 20lb. bag of dog food made a lot of sense to people who were loading them into and out of the trunk of their cars every month.  Capped off by the fact that Pets.com actually charged less than most brick-and-mortar pet supply stores, this one had all the makings of a winner.

There were several VCs invested in this. One of the early investors was Amazon.com.  Amazon was still selling mostly books at that time. Pets.com sold far fewer distinct products. Amazon felt that with fewer products to sell, it could lend Pets.com logistical support.

Like Flooz, Pets.com had a large advertising budget and a celebrity spokesperson, in this case, a canine sock puppet. The spokes-puppet was everywhere, on the Today Show, the Tonight Show, and at Macy’s Thanksgiving Day Parade. There was even a Superbowl ad.

The company went public in February 2000 raising more than $80 million. The venture funds made a profit but the investors in the IPO lost big.  Nine months later, Pets.com closed its doors and liquidated.

The problem was that Pets.com never made a profit. It hemorrhaged money both before and after the IPO.  Its low prices, coupled with the fact that it absorbed shipping costs on those big bags of dog food and the fact that it spent a lot on its advertising campaign, meant that the company lost money on every order.

Why would an underwriter take a company public if it was losing money?  Why would the underwriter price the offering at $11 per share when that valuation was a fantasy? That is the question no one asked at the time. 

The answer was that the VCs and the underwriters were in bed together. Each IPO made a lot of money for both.  It was actually a con game. VCs invest in each other’s portfolio companies, bumping up the valuations with each round, hoping for an IPO to dump the grossly over-valued shares on the public.

Historically, at least since Ben Graham, earnings were the metric by which a stock’s price was judged. That began to change in the 1980s junk bond era.

Junk bonds were issued by companies that lacked the cash flow to make interest payments on bonds with lower interest rates. They promised that the infusion of cash would spur their growth to the point that they could make higher interest payments. Very few actually did. 

Carry that forward 10 years when research analysts at the big Wall Street firms underwriting the dotcom stocks started to value growth over income. They claimed that the new internet era required new metrics.

I asked many of the analysts, including several I cross-examined under oath if they had ever seen the idea that growth should supplant earnings as a metric in the valuation of a company in a peer-reviewed journal. I never got an affirmative answer, nor would I have expected to get one.

Then, as now VCs are self-serving con artists. The valuations they spit out mislead investors and are part and parcel of a scheme to defraud them.

Venture capital is a marginal activity in the capital markets. In many ways, the JOBS Act has made what they do obsolete.  Raising seed or growth capital has never been easier or less expensive. Unfortunately many people in the Reg. CF space have adopted the VC pricing model and mislead even the smallest, most inexperienced investors.  

There is one more thing about flooz. Before it closed its doors Flooz.com it was notified by the FBI that as many as one in five of its gift cards had been purchased by Russian mobsters using them to launder money. The same is clearly true about bitcoins.

My early investigations into BTC in 2016 produced reports of Australian law enforcement officers seizing $12 million in BTC from a human trafficking ring. That was followed by several thousand ICO offerings that raised multiple billions of dollars from unsuspecting investors and just disappeared.

Flooz was a template for the crypto crimes that are running today up to and including FTX.  People who tell me that I don’t understand crypto as the future of currency and finance never mention flooz. As far as the future of crypto as a currency is concerned, if you don’t know flooz, you don’t know squat.

The crypto con game follows the flooz game plan right down to the Superbowl ads and celebrity endorsements. The end game is the same, dump crypto onto small, uninformed investors.

I will continue to blow my whistle at Fidelity Investments which is trying to legitimatize BTC for retirement accounts. I have read the research reports that support that recommendation. They would make the worst of the dotcom era analysts blush. Fidelity was still claiming BTC is a superb store of value after the price dropped from $60 to $16.

Fidelity isn’t buying and then selling BTC to make a legitimate spread. They have been mining BTC since at least 2014.  They have a minimal cost basis on each bitcoin that they are selling at $20,000 each.

Markets run in cycles. There was a tech boom and bust in the 1960s that coincided with our race to the moon.  There were companies back then raising capital for the next shiny new tech products.

There were certainly scams and certainly victims of those scams. But nothing that had the power and reach of the internet and social media to falsely pump up valuations and make a lot of people believe them.

Perhaps the biggest red flag is Satoshi himself. There are people who worship at his feet. There are people who call him a modest genius who shuns the limelight. They refer to Satoshi as someone who changed capitalism forever.

Will Satoshi come out of the shadows if he gets a Nobel Prize for his achievement? Will he fly to Stockholm and humbly thank his mother for pushing him to study and his mentors for inspiring him to think?

Personally, I think Satoshi is a construct of Russian oligarchs who created a system to launder their money and a narrative to legitimize it. Satoshi’s paper came about only 8 years after Flooz.com shut down.

Am I being too cynical?

Actually, I am just following the money. Un-named “whales” dominate the market bitcoin trading market. It is certainly plausible that bitcoins were created by mobsters as a way to launder their money and not the other way around.

Besides, I would rather think of Satoshi as an international criminal than a shy, misguided genius.

It’s the romantic in me. 

If you’d like to discuss this article or anything related, then please contact me directly HERE

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The Great VC Con Game

Capital Markets, Investors
The Great VC Con Game

I speak every week with people looking for funds to start or expand their business. With investment crowdfunding, the process has actually become relatively easy and inexpensive. Most people come to me to use crowdfunding as a first choice to fund their business. They appreciate the opportunity to fund their business on their own terms.

Sadly, some report that they spent upwards of $25,000 and more than a year flying around the country attending conferences and pitching to dozens of venture capitalists. If they had called me sooner, I would have told them to save their money.

Pitch Decks

There are a plethora of books and articles and an industry of vendors hawking “pitch decks that work”. Few actually do. When I see a pitch deck I can often tell which “guru” it is trying to follow. 

Unfortunately, most of these experts know nothing about what motivates investors to write a check. One in particular who seems to post on LinkedIn every few hours actually offers the worst advice that I could imagine. 

Logically, investors in your company should really want your company to succeed.  If you want their money, it would seem natural that you would tell potential investors what you intend to do with their money in order to make more money.  Yes, it really can be that simple.

Compare that to the pitch decks that follow the “find a problem and solve it” template. They often minimize the focus on projected revenues and profits. They often leave out the details of how the company will execute its business plan to get there. From an investor’s point of view, return on their investment (ROI) rules.

VCs actually fund a very small number of businesses (in the low 1000’s) every year. Most of the money available for venture capital investment is concentrated into a handful of large funds. Some of the available capital will flow to “serial entrepreneurs” because venture capital is a fairly closed network of people and money.

I was introduced to my first venture capitalist when I made my first visit to Silicon Valley in the mid-1970s. There were a lot more trees and open space on the way to Sand Hill Road back then.

At that time VCs in Silicon Valley were a very small group of very smart people. Many were MBAs or had MBAs on staff to crunch and re-crunch the numbers. This was no small task in the years before VisiCalc.

These VCs were using their own money and the money of a select group of wealthy investors to help small tech companies get their business up and running.  Their goal was to hand these companies over to the investment bankers specifically for a public offering. 

Investment bankers wanted these companies to be profitable before an IPO.  After the offering, research analysts affiliated with the investment bankers were going to project growth in earnings per share. That assured that the IPO investors were almost always going to make a profit from their investment post-offering.  Everybody would win.

San Francisco

I moved to San Francisco in 1984 to work with a law firm that represented a London based VC fund. The fund was making investments in 1980’s era hardware and software companies, companies with cutting edge ideas and those in more traditional businesses as well.  I sat through a lot of pitches. Very few of those companies got funded even though the pitches were well thought out and supported by real facts and research. 

I remember listening to one of the partners in Sequoia Capital being interviewed on TV discussing what they liked about Apple when it was still at the venture capital stage.  I recall that it was more about Steve Jobs’ focus on the design and packaging as it was the tech.  It was more about gross profit than market share.  

Today it seems like “gross profit” is a curse word in the venture capital community.

Investing has always been rooted in mathematics. Today’s VCs have chosen to ignore the traditional math and have created a new math, to line their own pockets, even as the companies in which they are investing continue to fail.

Dotcom

Beginning in the 1990s and especially as the dotcom era heated up, a lot of people who worked in around Silicon Valley, thought that they should become venture capitalists. Some had been founders of the earlier tech companies. Some claimed to have the connections and insight to bring more than money to these portfolio companies. 

The net result was a de-emphasis on the actual, achievable projections of income and how a company might execute to get there. It was replaced with a mindset that said “this is a great idea; millions of people will come to our website and buy our product”. Translated, that means: “Profits? We don’t need no stinking profits?”  

The investment bankers bought into this because it enabled them to make a great deal of money. They took a lot of companies public without real earnings. They then used convoluted reasoning and research to predict share prices in the hundreds of dollars. 

The analysts looking at the dotcom companies created a metric called “growth per share”. I asked one of the prominent tech analysts if they had ever seen that metric in a peer-reviewed journal. Of course they had not.

In the current market bull market post-2008 the VCs have moved the goal posts even further to feather their own nests. Rather than find more and more good companies to fund, they are increasingly conducting multiple rounds of financing on a smaller and smaller group of companies. Most are destined to failure because they cannot operate profitably.

Venture Capitalists

VCs like other money managers get an annual % of the amount of money invested in their fund. The best way to attract new investors is to demonstrate success. If a VC invests in a company at $1 per share and the company goes public at $10 per share then the VC’s success is easy to calculate. If none of the companies in a VC’s portfolio actually go public, the VC’s success is harder to demonstrate.

To solve the problem, VCs have created a metric called “pre-revenue or pre-earnings valuation”.  You will not find it in peer reviewed journals. It is the closest thing finance has to an oxy-moron.

It works like this. Ten VC funds each invest in a seed round of 10 companies. Then some will invest in a Series A round of some of the companies in the other VC’s portfolios, then others will invest in the Series B round, etc. In the end, these VC funds have cross funded each other’s deals at different levels.  Each level is priced higher than the one before.

In the seed round a VC invested $10 million for 10 million shares of the outstanding shares of each company.  By the Series C, D or E round those shares are being sold to the other VCs and now cost $50 each. 

Does that make the original shares purchased in the seed round worth $500 million?  If the company has now issued 200 million shares, is the company worth $10 billion? Not in the real world and especially not if the company is still not profitable.

However the VC can now claim that its original investment is worth much more and use that “fact” to attract more investors into its fund. The VC will receive a % of the amount invested yearly for a decade or more. 

WeWork and the other unicorns will be the subject of business school case studies for at least the next generation. They are the most recent example of what may be the oldest theorem in finance: you can fool some of the people all of the time.  

Capital for new and smaller ventures is essential to the entire system of finance.  Investment crowdfunding is actually a response to the failures of VCs in the dotcom era. The arrogance displayed by VCs in this current market has probably done more to cement the place for investment crowdfunding than anything else. It is up to the crowdfunding platforms and professionals not to make the same mistakes. 

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The Cold Hard Truth About Funding Start-ups

Capital Markets, Issuers , , , , ,

Contrary to what a lot of people seem to believe, it is not that difficult to fund a start-up. Funding a start-up is a process.  It requires a plan and time, effort and money to execute the plan.  The process varies depending upon where you intend to procure the funds. That decision is most often determined by what sources of funding are or are not available .

More often than not the availability of funds depends upon the attributes of the company being funded.  Who you are, how far along your company is and the realistic chances for success are usually the determining factors.

If you believe the blather that successful start-ups must disrupt an existing market or must solve a problem that the market may not know it has, you are making it harder for yourself, not easier. Lenders want the loan principal returned with interest and investors want their capital returned and a return on their investment. You need to adopt that mindset if you want to attract funds.

A great many small businesses receive funds from the Small Business Administration (SBA) which has been making loans to start-ups and small businesses for decades. Like most lenders the SBA wants collateral for the loan and will review your business plan to satisfy itself that you will have the cash flow to make the payments.

The SBA will assist in the process and provides mentoring for businesses before they apply. There are also private SBA loan brokers in every major city in the US. Not every small business qualifies, but many of the SBA loan brokers will provide guidance and assistance if the company is close to the qualifying line.

Venture capital funds (VC) or angel investor groups seem to be the choice for most start-ups. VC’s can provide management and other assistance in addition to funding. The bulk of venture capital money goes into second round financing and many of the funds specialize in tech or bio-tech companies only.

Most venture funds are willing to take a calculated risk on young companies. That calculation includes their ability to recoup their funds with some type of post financing liquidity transaction, like a merger or IPO.  Consequently, a great many companies do not qualify.  In truth, VC’s only fund a very limited number of smaller start-up companies every year.

There are far more companies that are chasing venture capital than there are venture capitalists. Consequently, the VCs usually get to fund the best companies they see.

The world is full of stories of companies that pitched dozens of VCs before they got funded and even more companies who repeatedly pitched VCs and never got funded. There are a great many books and consultants who will tell you how to make your pitch better but the truth may be that your company is just not as attractive as the others competing for the same funds.

I would hope that it would be obvious that it is easier to find funding for a company with a well thought out and well prepared business plan than a for a company whose business plan looks like it was written on a napkin by a couple of drunken frat boys.

Investors will certainly want to know if your product works, whether or not it can be sourced, whether or not people will purchase it and at what price.  You can show them with spreadsheets and marketing studies or you can start selling your product and generate some revenue.  An operating company should always be easier to finance than a company that needs funding to begin operations.

This flies in the face of the idea that all an entrepreneur need do is develop a minimum viable prototype (MVP) and then shop it around to venture capitalists. I have known a lot of VC’s over the years and almost all would tell me that they fund businesses not prototypes.

Investors also legitimately want to know exactly what you intend to do with the funds that they give to you. They also want you to use their money efficiently.

Several years back I met with a young code writer who was working at one of the larger Silicon Valley companies. He and a few of his co-workers had an idea for an APP. They wanted my help to raise $1 million so that they could quit their jobs and spend a year working on it full time.  Once the APP was developed and tested they would have had no money left for marketing and no one with any marketing experience to help them.

I suggested to him that it might easier to raise the money if their plan was to have the code for the APP written in India for a lot less and use the difference to package and promote the finished product. That way he and his cohorts could keep their day jobs and they would have a sufficient monies to hire a real marketing pro to help sell the product once it was developed.

I might as well have suggested that they enlist in the Army. They wanted the entrepreneurial experience paid for by someone else.  A good VC will see through that attitude and as far as I know that particular group never got the funds they were seeking.

Crowdfunding`is the financing tool that is the foundation for my belief that funding any start-up is not that difficult. If you follow this blog you certainly know that I continue to be concerned about the absolute disregard for investors in this market. But executed correctly, a good crowdfunding campaign should obtain the funds it seeks almost every time.

I recently had a beer with a long time friend is a lot more cynical than I am.  His thought was that since you could fool some of the people some of the time, I should just embrace that fact and come around to the thinking that any start-up could get funded if it spent enough money advertising its offering in the right way.

My friend was thinking that a good advertising company could put lipstick on any “pig” of an offering and sell it to investors on a crowdfunding website because most investors in this market really had no idea what they were doing.  While I personally decline to assist bad companies looking for capital, many in the crowdfunding market will simply list any company that shows up on their website.

I have a little experience in advertising and a lot of respect for people who do it well.  Selling securities usually takes a different approach than selling a product but my friend was thinking in more generic terms.  The point here is that selling securities is often referred to as a “numbers” game.

Advertising is about “eyeballs”.  If you want to sell shares in your company to 500 people, then a lot more than 500 people need to see your advertisements for the offering.

When someone comes to me with the desire to crowdfund an offering, I always recommend that a good marketing company is essential.  Several marketing companies that work in the crowdfunding market are careful to follow the rules. Many more are not.

Whether you are selling a loan package to the SBA or equity to a VC, angel or crowdfunding audience the operable word is sell.  Selling is not free. The old saying that it takes money to make money is true here as well. It takes money to raise money.

If you want to fund a new business you should be prepared to spend money for a professionally prepared presentation. I know a company that sent e-mails and their presentation to a list of one thousand VCs and Angels six times before one responded. They then flew cross country, made a presentation and got nothing.

With crowdfunding, I again recommend that you hire someone to prepare a professional presentation, a good lawyer to help you prepare the paperwork and budget enough money to drive potential investors to your offering. If you want to raise funds for your business, it will cost you money to do so.

I speak with a lot of people who essentially bootstrap their business until they are ready to bring it to market and then seek funding. Many are stymied because they are essentially broke at this point and do not have the resources to pay for lawyers, business plans, videos and a marketing campaign.

A lot of people wring their hands and feel sorry for this group. I,however, am not among them.  I believe that any company good enough to seek funding from strangers, should be able to borrow enough from family, friends, neighbors and college roommates to pay for a campaign to raise more funds.  If your Uncle Fred who has known you since childhood is not willing to invest in you, why should you think that my Uncle Fred or anyone else’s would?