It used to be that if you wanted to develop a high growth company you sprinted to raise capital first and build a business second. As a result VC’s sprung up like weeds. You raised as much as possible as quickly as possible – grew at warp speed and then hung on for the ride. Well, no more. Today cool start-ups move in a measured pace focusing on quality before quantity. Founders start out with a developed idea, a brand, Website and product launch completed before they raise a friend and family round with only FRIENDS and FAMILY. Just $100,000 – $150,000. Next they do a seed round with angels raising $250,000 – $350,000. Last they raise a third and final round of $1 Million to $1.5 Million with a bunch of angels or a couple of super angels. The first two rounds should be convertible deals or common shares and only the third round a more sophisticated transaction with perhaps preference shares and other bells and whistles such as tag along rights and liquidation terms. Discover angel networks, network directly to industry savvy angels and consider alternative forms of capital. By the end of the three rounds the founders should still hold around 50% of the company and control its destiny. This creates a leaner start-up but its worth it. Angels are better suited to supporting the growth of early stage companies whereas VC’s are better suited to a potential fourth round of expansion capital way down the road once you’re profitable, successful and have a totally proven model. Use them to take your idea overseas or into new markets or product areas – do not give them more than 10% of your company in exchange. Once we see VC’s rebranded as Expansion Capitalists the transition will be complete. It nearly is.
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