Satya Murthy

from: http://smartstartup.typepad.com/my_weblog/2007/09/how-to-find-sta.html

I have this conversation at least once a week.  Some visitor to my site on financing startups spends a couple of hours reading all, or most of it, and decides to call me up. The conversation then, almost invariably, goes like this.

Caller: Hi, I read your site. It’s fantastic, by the way. Look, we’ve been trying to raise X dollars for over 6 months now, without any luck, and we’re starting to get desperate.

Can you help us raise X dollars?

Me: Well, it doesn’t really work that way in real life. Raising money is actually all about relationships and personal trust. Let me put it this way. You have three basic financing options out there.

The first and best bet consists of your former investors. These are people who gave you money in a previous deal and made off like bandits as a result. They know you, trust you, and believe in you.

Caller: Hey! That makes perfect sense.

Me: Your next best bet consists of the "3Fs", otherwise known as "family, friends, and fools".  This group includes dad, mom, uncle Ziggy, your Yale "frat bro" Chipper Drysdale III, and anyone else foolish enough to fall for your pitch (e.g., your dentist).

Caller: Got it!

Me: The final option is to get creative and do what most of the great entrepreneurs did at the beginning when they were in your shoes and couldn’t raise a dollar either. This third option is what my Smart Startup Guide teaches you how to do. It teaches you how the greats started with minimal or no capital. It goes into great detail about their strategy and tactics.

Caller: Well, I’ll be danged! Wish I had known all this 6 months ago.

Me: So, Mister Caller, let me ask you if you have any previous investors whom you made rich and who trust you?

Caller: Ahh, no I don’t. I have never made money for anyone. This will be my first business.

Me: Hmm, okay, let’s work our way down the list. What about the 3Fs? Do you have any family, friends, or dentists who would be willing to gamble their savings on you simply because they like you?

Caller: Ahh, no I don’t. My family is not rich and I didn’t graduate from an Ivy League school.

Me: Hmm, well then you need to forget about raising any outside money for the time being. Instead look at devising an alternate strategy for launching your business. You need to show potential investors that you have what it takes to create some cashflow first. Then they might take you seriously enough to invest.

Caller: Wow, I never knew any of this stuff. This explains why we haven’t been able to raise any money with our business plan despite 6 months of pounding on doors and doing "dog and pony shows" for angels and venture capitalists.

Me:  Yes, it does explain it. Investors only invest in entrepreneurs they know and trust–or those who have proven the viability of their idea with actual cashflow.

Caller: Sure looks that way.

[There's usually a short pause here before the final question.]

So, can you help us raise X dollars then?

~

At this point I usually feel like banging my head down on the desk. So if you are tempted to call me about helping you to raise capital, please don’t. I wrote the Smart Startup Guide for people who have wasted 6 to 18 months of their lives in a futile capital pursuit. After this much time they have either become realists or quit. But both finally understand that a business plan alone means little to investors. So feel free to invest or not invest in the Guide, but please don’t call me about helping you to raise money.

I decided to post this because the number of entrepreneurial wannabes who waste 6 to 18 months chasing capital with nothing more than a business plan is absolutely staggering. They might as well just stay at home for the same period buying lottery tickets. The odds of success are about the same.

So what’s the take home here? First-time entrepreneurs should focus on proving that they can generate some cashflow first. The investors will follow. Don’t fall for the hype from the business plan industry which tries to fool you into thinking that all you need is a well-written plan.