A version of this article previously appeared Forbes.
Professional investors do not fund great ideas. Instead, they fund proven businesses. The reality is that most venture capitalists are not very venturesome. Thus, it is incumbent on entrepreneurs to turn their ideas into viable businesses before seeking venture funding.
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Entrepreneurs Are Never Stuck
I recently was sent a Tweet from an aspiring entrepreneur which said, “I have a prototype but I need funding to bring it to market. I’m stuck.”
Wiley entrepreneurs pre-sell their products and get customers to fund their businesses. They are never “stuck.” For instance, at Computer Motion (acquired by Intuitive Surgical), we envisioned a robot that would assist surgeons and allow them to perform “open” procedures minimally invasively. We were long on vision and short on capital.
Instead of feeling “stuck,” I hit the road and began pre-selling our vision of a minimally invasive cardiac robot via a PowerPoint deck. Within a couple of months, we had orders from the Cleveland Clinic, Hershey Medical Center and Brigham and Women’s Hospital. In each case, we were honest with the surgeons, making it clear that we needed pre-payments so we could build the robots. These sales allowed us to prove the efficacy of robotic surgery and ultimately led to the creation of the medical robotic industry. If we had waited around for an investor to fund our vision, we’d still be waiting.
Venture Capital Should Be Your Investor Of Last Resort
As a Partner at Rincon Venture Partners, we review over 1,000 deals each year, from which we make a half dozen or so new investments. The reality is that most ventures do not enjoy the growth rate that will lead to an exit large enough to provide a venture capitalist with a reasonable return.
As the following Kaufmann Foundation research makes clear, 90% of seed capital comes from sources other than venture capitalists. Even though VCs shy away from funding ideas, there are fortunately a number of seed stage alternatives.
Personal Savings & Credit Cards (36%) – All too often, the only person who truly believes in an aspiring entrepreneur is the entrepreneur herself. Thus, it is not surprising that the single largest source of startup capital comes directly from the business’s founder.
Banks (35%) – Startups with physical assets are good candidates for collateralized debt financing. Banks are precluded from speculative investing, but proven business models with hard assets (e.g., retail, restaurants, service businesses, etc.) are within their lending purviews.
Professional Investors (10%) – Most of the seed funding from VCs goes to previously successful entrepreneurs, rather than first-time founders.
Friends, Family & Fools (6%) – A common source of startup capital is from people who know the founder intimately and are willing to invest in her ability to succeed, rather than the merits of her idea.
Government (2%) – The SBA and various grant organizations (e.g., DARPA, NIH and NSA) offer a small percentage of startup capital, primarily because the regulations and ongoing reporting requirements are onerous.
Note: the figures do not add up to 100% because the balance is comprised of a variety of ‘other’ sources.
In addition to the above sources of capital, “unstuck” entrepreneurs tap into crowds to fund their businesses. Crowd sourcing platforms (e.g., Kickstarter, Crowdfunder and AngelList) are good options for startups that manufacture physical products customers can pre-purchase.
As the Kaufmann data proves, during a startup’s nascent stages, entrepreneurs should not seek venture funding. Instead, they should initially fund their businesses with their savings, the largesse of friends and family and most importantly, from customer dollars.
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Photo: Chris Ratcliffe/Bloomberg