Raising capital is an important part of starting a business. As an entrepreneur, you may be able to minimize or delay the need to raise capital if your service is relatively inexpensive to bring to market and you minimize expenses or find a quick path to revenue, but its more than likely that you’ll need capital at some point – either to simply bring the product to market or to capitalize on the opportunity by growing as faster than you would be able to otherwise.

The approach to raising capital is important, but it’s also very simple and straightforward. That’s not to say it’s easy. It’s a little like the Appalachian Trail – it’s a clearly marked hike, it’s difficult to complete, it takes many months, and it’s only confusing when you wander off the track or try to find shortcuts. The steps are simple: (1) founders (2) friends and family (3) angels (4) venture, but…


…but the optimal time to approach each audience is anything but simple. Each of these audiences has different requirements and should be approached at the appropriate time. If you spend time approaching these audiences prematurely, you waste your time and ruin your chance to make a strong first impression. Both of these can be catastrophic mistakes for a young company.

It’s helpful to think of the growth of the business in terms of milestones, mapping what will be achieved and delivered at different points. If these milestones are intelligently developed, they’ll map well to what the requirements of different audiences of investors. I like the stages of a start-up Eric Ries describes in his post on pitch hierarchy – I’ve used them above to map them to different investor audiences, and the general requirements they have to invest:

  • Founders. The only requirement here is conviction, confidence, competence, and optimism. The only place to start.
  • Friends & Family. The most basic of requirements: a belief in the founders, a gut-level sanity-check on the idea, and a little disposable income. Note that it’s this money that should be able to take a company all the way to prototype on the map above. It’s not a coincidence that these left milestones are unshaded while the milestones on the right are shaded – until you have a prototype, it’s hard to say you have a company, and even harder to talk to investors.
  • Angels. I define an angel as a higher net worth individual that has made multiple investments at arms-length. Angels are all over the map with respect to what they need to see – some are willing to invest very early, others need to see real traction in the business. However, these conversations are difficult at best without something concrete to show and demo, a prototype at the least.
  • Venture. Professional investors with real requirements. There are exceptions to every rule, but the starting point for real engaged conversation is micro-results that demonstrate the the product you are building works. It could be as little as a few thousand users, as long as you can point to key drivers and key metrics (user growth, engagement, etc) that are trending strongly and positively. In a tough economic climate, it’s becoming even more critical to approach with promising results that demonstrate clearly that many of the risks of the business have been eliminated and the core value prop of the service has been prove


Well, it’s true, none of this general advice applies if you are Marc Andreesen, Steve Jobs or Dean Kamen. There are examples of venture firms reaching far left on this page and investing in an exceptional prototype, or even all-star team or entrepreneur with a great idea. It does happen, but for the typical start-up and typical entrepreneur, it’s an unlikely bet.

When I meet entrepreneurs that are trying to skip the basic steps above and head right to venture, it sets off warning bells. Why haven’t the founders invested? Why haven’t their friends and former colleagues invested, etc. A desire to skip straight to venture can indicate more than a lack of understanding of milestones and fund-raising – it can signal real weakness in the entrepreneur.

Trying to skip straight to venture without the right supporting milestones is a bit like playing the lottery. Yes, you can get lucky but more often than not – you waste time better spent on the business and more appropriate audience, shoot your chance to make a good impression on venture investors, and end up with nothing in the end. Which leads us to…


  • Don’t ask family and friends for capital until the founders have invested. Not every founder is wealthy, but every founder can afford to make a meaningful investment in the company. When founder’s don’t invest, it’s a dangerous warning sign. As an entrepreneur, I want my investors to know that I believe fully in the idea. As an investor, I want to know that the entrepreneur is fully, irrevocably committed.
  • Don’t ask angels for capital until you have a prototype to show them. Without seeing a prototype, its virtually impossible for an investor to even think about investing. On the flip side, as an entrepreneur, your whole life will change the second you have a working prototype to show people.
  • Don’t ask venture firms for capital until you have at least micro-results to show them. At the minimum, you’ll have a few case studies that show your concept and product work at a small scale, with good indicators it will work on a larger scale. Ideally, you’ll have promising results. Sometimes its good to get on a firms radar early, and start developing relationships with prospective investors. If you do, its good and reasonable to make it clear that you are looking for counsel, not capital. If they really want to invest prematurely, they’ll let you know.


At Visible Path, my co-founder and I invested the first $100K in the business. A dozen friends and family members contributed the next $250K, then a half dozen angels contributed the next $500K. Finally, a year into the business, with four enterprises showing micro-scale results, we closed a $5m series A venture investment.

Bottom Line: Take one step at a time, appropriately mapping your outreach to different audiences against the milestones the business has achieved.

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