The primary reason for the explosion of information available on the web.  From killer websites like Venture Hacks to in-depth coverage of start-up legal issues on places like StartupCompanyLaywer.com to reviews of potential investors on places like TheFunded you now have access to an incredible amount of stuff that previously only a small group of people were privy to.  My main advice?  Triangulate.  Read a whole bunch about the fundraising process from a number of different sources knowing that while no one has the complete story by assimilating information from a lot of smart people you can get a fantastic grip on how and when to raise money for your company.  

So I’m throwing my hat in the ring with a listing of some of the options you have to fund your company and the pros and cons (imho) of each.  There’s definitely a lot I don’t know but I have been a part of starting four companies that were all financed in very different ways.  Two were sold to public companies, a third is currently profitable and the fourth, well, you’re on it right now. :)  I hope that some of my experience and perspective can be helpful to you in your entrepreneurial journey.  If you walk away from this article with just one new idea that helps your company then I’ve done my job here.

Option #1 - Bootstrapping.  

Simply put, if you can bootstrap then bootstrap.  It’s not for everyone (after all you have to have a willingness to potentially eat a lot of ramen!) but if you can pull it off I think it’s the best (and purest) way to create something meaningful.  The benefit of bootstrapping is that you control your destiny.  No one to impress, no bullshit politics getting in your way, no ebb and flows based on what the Nasdaq decided to do in a given year.  

And bootstrapping is easier than it’s ever been.  Tech companies can leverage open source software and S3 and EC2 and all sorts of other things to keep their costs low.  Everyone can outsource big chunks of non-core activities and get to market much cheaper than ever in history.  And with the Internet you have a global market to sell your product to.  It’s an awesome time to be a bootstrapper!

I bootstrapped my first company (largely) by working a day job and keeping the business super-lean and it was a great experience.  When I sold the company it wasn’t a huge sale but I owned 100% of the company so I did better than a lot of folks I knew who had raised capital from investors.

But bootstrapping isn’t for everyone.  You couldn’t have bootstrapped YouTube or Google (but what’s kinda crazy is you might have been able to bootstrap eBay!).  If you want to create something big and world-changing you often need the boost that outside capital gives you in the early stages.  Especially if you have an amazingly useful product but haven’t quite figured out the perfect business model yet.  After all, with no venture capital we’d likely never have had a company like Twitter emerge.

If you’re bootstrapping I’d highly recommend a super intensive focus on customer development and increasing your allowable acquisition costs.  In other words, build something that you are pretty darn sure someone wants and that has a sustainable business model and customer acquisition strategy behind it.  Do anything else when you’re bootstrapping and you’re setting yourself for failure.

Option #2 - Friends and Family Money

If isn’t possible to bootstrap a business through internal cash flow, consulting, credit cards, etc. then the next step is often to look to friends and family for capital.  This can be wonderful and also can have disastrous consequences.  This strategy tends to work best if you ask yourself and your potential investors the uber-important question “Is this money you can afford to lose?”  

Make sure the answer is yes.  If it’s not you’re setting yourself up for a big fail in the form of not only the business not succeeding but you damaging relationships that are very important to you.  Nothing beats the joy of sitting across Uncle Harry at Thanksgiving dinner knowing that you lost 50 Gs of his earlier that year.  OK, hasn’t happened to me but I can’t imagine that being very comfortable.

As long as you’re convinced that the money you’re asking your friends and family to trust to you isn’t money they’re planning to use to send their kids to colleges or something then I actually think F & F money is a great option.  Your friends and family know you best and they’re often willing to bet on your crazy idea well before a professional investor will.  They’re less sensitive to valuation (usually) and will give you friendlier terms than an institutional investor will.  And there’s an often unaccounted for ego value of their investment that can work in your favor (unlike a VC who isn’t going to get any sort of ego boost from investing in your nascent and unproven startup).

A couple more things about friends and family money.  First off, don’t do something dumb like raise $25K or $50K from friends and family.  The lawyer bill just to do a financing right and completely screw things up for the future is usually going to be at least $10K so right off the bat you’re paying 20-40% of your money to your lawyer.  I personally think that isn’t very wise.  Don’t do friends and family unless you’re going to raise $100K and ideally at least double or triple that.  

Second, make sure to set up the structure of your friends and family round so they don’t get completely screwed by institutional investors who will come in later.  The last thing you want to do is have Uncle Harry take all the risk and be the first money into your company and then end up with him getting a pittance when the company exits for a moderate amount later.  That’s almost as bad as losing his money.  Think about the impact of future financings on your friends and family round and ideally bring in a good lawyer who can explain the impact to you.  

Option #3 - Professional Angel Investors

There are an increasing number of professional angel investors out there these days and taking money from them can often instill as much positive mojo into your company as raising money from a VC.  Professional angels are awesome when you can’t quite raise enough money from friends and family to make your ship float (often true if you’re younger and haven’t built a powerful network yet).  They’re also great when you need someone to bring an extra level of intensity and expertise to the business that can’t be found among the people you know.  And they serve as an excellent bridge to the world of venture capital, often helping you by making introductions, giving you advice, etc.

There are a lot of outstanding guys who do this for a living including people like Ron Conway, Jeff Clavier, Josh Kopelman at First Round Capital and Mike Maples (and I’m leaving out a ton of folks here).  These guys are in the trenches with entrepreneurs every day and they’ve all helped a number of highly successful companies grow.  In addition, there are amazing program out there like YCombinator, TechStars and betaworks that serve similar roles and often add even more hands-on attention.  

Are there downsides of working with professional angels?  To be honest, not very many.    It’s often tough to get access to them since there are relatively few professional angels compared to the number of VC firms out there.  In addition, once you step outside of the world of the top 50 or so professional angels the quality can vary widely.  Do a lot of research into the track record of the person you’re pitching to.  Remember that you are interviewing him for the privilege of investing in your company just the same as he is analyzing you and trying to decide whether to place a bet.  Check up on her through other people she has invested in in the past.

One final potential caveat about taking smaller amounts of money from professionals.  You need to make sure that if the investor can back you in future rounds they will.  If you raise a small round from someone with deep pockets any future investors will typically expect that they will ante up again to at least maintain their pro rata share in future rounds.  If they don’t that sends a huge negative signal to possible investors.  This usually isn’t an issue with professional investors but is worth considering, especially if your “angel round” comes from a larger institutional investor.  

Option #4 - Venture Capitalists

There’s so much to say here that I’m only going to scratch the surface.  VCs can be the best thing in the world.  They can be the worst thing in the world.  Talk to 100 entrepreneurs about their experience with VCs and you’ll receive 100 different stories.  I’d sum up a lot that I’ve experienced, heard of others’ experience and read with four main guidelines:

First, do your homework.  You can learn a ton about almost any VC firm these days by checking out their website, reading the blogs of people in their firm, checking out TheFunded (Note of caution: Take what you read their with a huge grain of salt. It’s often false or misleading. Still worth reading though.)  Don’t waste your time pitching a firm that would never invest in your consumer Internet advertising play simply because you didn’t spend time to find that out upfront (I’ve been guilty of this type of thing before).  Don’t even think of going in to pitch a firm until you’ve checked LinkedIn and Facebook to see who you know might know someone at the firm.  Pitching takes a ton of time and yet it’s amazing how many people will spend hours perfecting a deck and only a few minutes (if that!) doing their due diligence on the people they are going to pitch (Been there, done that before...don’t be me).  

Second, do your math.  So many people are desperate to raise cash and they fail to take into account the net results of all those venture capital rounds will be.  Remember, there aren’t really all that many exits out there right now (and it’s anyone’s guess as to when the days of lots of exits will return).  So there’s a good chance it’ll be a long slog if you raise cash.  And if you can’t get your business profitable then you’ll be going back to the well time and again.  That might mean that in a few years you’ll have a precious small stake in, and little control over, the company that you now call your baby.  That’s not a reason to avoid venture capital.  Rather it’s a warning to do the math realistically and think about what it will mean if you end up doing a Series C, D or E round someday.  

Third, do your dance.  Once you’re a solidly established business you’ll have a lot of the attention focused on how the business is actually doing.  But in the early stages you’ll be evaluated on your pitch (your “dance”).  How big is your vision?  How compelling is what you’re building?  How realistic are your expectations?  How likely are you to pull this off?  There’s so much that goes into a good pitch and that’s likely a good subject for a future post.  For now I’ll say that I think the fastest way to improve is to model those who are successful at pitching.  Watch Steve Jobs on repeat.  Find a few friends who’ve raised venture capital and pitch them.  Schedule a couple of “throw-away” VC meetings to work out the kinks.  A lot of very promising businesses have died on the vine because the entrepreneur either wasn’t a good enough pitchman or didn’t know enough to bring a good pitchman on board.  Don’t be one of those.

Fourth, do your business.  At the end of the day if your traffic and revenues are doubling every month you’ll raise capital.  It’s super easy to get caught up in the VC game and forget about building your company.  So do yourself a favor, take Nivi’s advice and go out a create a market for your shares.  Confine yourself to set amount of time for fundraising and if you can’t make things fly by then figure out how you can go back to the well and make what you’re building even that more compelling.  Get to that elusive product-market fit.  But don’t be in perpetual fundraising money because that will drain your energy, distract you from building a great product and ruin any chance you have to get momentum in the process.  

OK, that’s all for now.  I will probably revisit this again in the future at some point and will definitely be covering all of this in a lot more detail in my upcoming Entrepreneur Boot Camp class.

Photo credit: http://www.flickr.com/photos/amagill/3367543296/