It has been an interesting couple of weeks for start-ups in Los Angeles. Along with the myriad of events to attend around innovation in the city, there has been a record amount of capital and venture money handed out to start-ups in the Greater Los Angeles Area. This last quarter has seen $811M funding record for LA tech, and projections for Q4 is looking even better.
Recently I sat down at a roundtable with about 30 venture funders, bankers and investors – it was an assortment of the who-is-who in Los Angeles investment. There was a small four-member panel giving advice based on their experience as serial start-up investors.
There were several key take-aways from the event which resonated (and which should continue to resonate with start-ups) amongst the group.
1. LA Investment is getting more sophisticated and mature. The Los Angeles venture capital and investor community is divided on how they should fund certain stage start-ups, which has created a new kind of investor, the one that wants to attract those start-ups that are looking for less than half a million, but aren’t quite a seed or angel investment. This has opened up alternative forms of funding, including bank loans, more and better crowdfunding options and peer-to-peer lending. Looking for options is better for start-ups.
If you are seeking less than a million but more than $700K, you are generally going to be too small for VC, but you are too big for angel, and should seek funding from a specialist investor, or an alternative funding stream. This means you will need to modify your pitch, and articulate in that how you will acquire any shortfall.
2. A VC might not always be the best or ideal funder for your start-up. Given the kinds of options available in the market now, the VC should be the last on your list. Best advice from the panel was to be so good that it motivates the VC to step in. Further, seek a VC when there is possible sale, liquidity option or M&A.
Alternative funding does exist but requires calculated risk assessment, and some savvy pitching. One investor relayed the story of vendor financed start-up. This is where a start-up extends their 30-day payment out for inventory, and some manufacturers can be convinced to defer payment until goods are sold. Combinations of funding, some overlapping, are becoming more commonplace among good start-ups, and bootstrapping can sometimes not be good enough in the hot investor climate.
3. Due diligence is needed against investors. The first question a start-up should ask is “Is this investor right for me?” If the answer is ‘yes’, then the start-up should find as much as they can about that investor: what they have invested in, in the past, how much they have invested, their success rates and their criteria for investment. Any pitch should aim at those strong points.
4. Investors want to see a plan. Good investors what a minimum of a few things: they want to know what they will get out of investing, they want a clear business case, they want an exit strategy and they want to know a start-ups expectation (which may vary wildly). Coherence is key – an investor, even a bank issuing a bank loan, want to see on paper what you are aiming for.
5. Team. Has your start-up have the team necessary to execute the aforementioned plan? It should. That is the bottom line. You team should be strategically oriented and mission driven. It’s really is that simple.