What does it take to get your tech company funded by people other than your family and friends? It’s a lot harder for tech entrepreneurs than for those who are trying to raise capital for a brick and mortar business. The product and customers are sometimes less tangible.
Before launching FileBlaze, a cloud-based file storage and streaming service, Chuck Baker, 41, worked as an executive producer for music artists like Mya and Dru Hill. He realized there was a void in ways to transfer large uncompressed files like music, videos, and photographs, and preview them in real-time from the Web without also downloading other memory intensive software. He created FileBlaze to help prevent piracy, leaks and unauthorized downloads of copyrighted material.
Initially, he and partner Rhahime Bell relied on angel investments. Over a three year period, they raised approximately $2.5 million from 16 investors, including themselves, family and friends like former basketball player, Alonzo Mourning, and filmmaker, Malcom Lee. Baker used the money to erect the site in increments starting with an alpha prototype that cost $250,000 to build. With each new investment they deployed new features to the site. Recently they received a bank loan for an undisclosed amount and they’re hoping to raise $15 million on their next round of financing. Despite so many investors, the two still retain a 59% majority ownership in the company.
Whether you live in California’s Silicon Valley, New York’s Silicon Alley or somewhere in between, it’s important to understand how angel or venture capital financing works in the technology world. You don’t want to make a bad impression by pitching a venture capitalist when you don’t have all of your ducks in a row.
Most startups boot strap and use angel investors to do market research, file a patent, and create an alpha prototype, but the first round of financing, sometimes called the Series A, is the amount a company needs to secure to create a beta product, recruit the first set of core employees or partners, test the product, and begin generating revenue. Series A financing can be between $1 million and $12 million depending on the company’s needs and goals, and investors at this round are usually taking a big risk.
Also know that VC money isn’t free. Expect to give up a percentage of your equity to your investors. The more risky the investment, the more equity you might need to give up. Series B financing is usually sought after the company has become more established and the amount can range depending on the valuation of the company.
Funding rounds can be made as long as the company needs money to expand operations. For example, Gazelle, a four-year-old, Web-based company that recycles cell phones and other electronics for cash, raised $22 million in a Series D financing round. The company plans to use the new round to market its services to mass media.
Continue to next page to continue reading and watch Chuck Baker’s start-up tips…
Even Twitter, which has been around for more than five years and is valued at $8 billion (according to the tech blog AllThingsD), recently raised more money by authorizing the issuance of 25 million new shares, priced at $16 per share.
While visiting San Francisco this summer, I dropped by the FileBlaze office to talk with Baker about how he was able to build capital, retain equity and keep his company on track. Watch the video and read below for his insights.
Invest in your intellectual capital. You need more than a vision to ask people for money. This means if you can’t bring money to the table, then bring your skills and experience. Investors will fund you if they trust that you or your team has a solid business or technology background. Find people who can fill in the gaps where you lack skill or experience. “If you’re a business person, find a chief technology officer. If you’re a CTO, f
ind a business person that has experience bringing products to the market,†says Baker, who also previously worked as director of strategy at Village Ventures, a VC firm.Fund to the next milestone. Don’t try to raise $1 million and tell investors that they will see something in a year. Instead raise $100,000 to $150,000 and deploy an alpha or beta prototype, or try to make your company revenue positive. This way you can reach a milestone and fund a second round with a higher valuation because now you have shown investors that you’ve accomplished something. That will help you avoid diluting the equity.
Focus on niche markets and niche consumers that you understand. A lot of times new media companies focus on the broad appeal of the Internet and all of the potential customers therein. Instead, Baker suggests that you focus in on a niche community. “Take a page out of Mark Zuckerberg‘s playbook. Focus on that freshman in your dorm at Harvard and offer the best product for that niche and hopefully that niche will become something that everyone can get excited about and reach a broader audience. With FileBlaze Baker focused on digital professionals, because he had worked in the industry and he knew the ins and outs of the needs of that community.