Finding investors in a recession.

Under normal circumstances, you’re likely to actually get money from less than 5% of the people you pitch to. Given the current state of the economy, that percentage is even smaller today. Barbara Bry, a very experienced San Diego startup veteran, told me earlier this week that 2008 is the worst market for raising startup money she's ever seen.

Don’t be dismayed by this - it’s a lot like selling your house. There’s usually a buyer out there somewhere. People turn you down because they have no need, or they have no money right now, or they’re in no hurry, or they don’t have confidence in the business proposition, or they don't understand your pitch.

Paul Graham from Y Combinator says, "VCs are mostly money guys, not people who make things. Angels are better at appreciating novel ideas, because once upon a time most of them were founders themselves. VCs reject practically everyone. The inefficient market you get because there are so few players is exacerbated by the fact that they act independently. The structure of their business means a partner at a VC firm usually makes a couple of new investments a year, no matter how many good opportunities they come across.”

To have confidence in a business proposition, investors need to see:
- a fundable concept
- in a growing industry
- with a good management team
- addressing a promising, profitable market
- with technology that works
- and a highly fundable CEO

The key issues for investors are:
- How will revenue be generated?
- Is the business idea going to generate a significant return on investment?
- Is the management team up to the challenge?

In the past, entrepreneurs started businesses. Today, many invent new business models. For example, Mark McDonald started Nations Air Express in 1992, flying from Pittsburgh to Philadelphia to Boston and back five times a day and charging $89 or less for a one way ticket. By hiring World Technology Systems of Atlanta to run its ticketless reservation system, Nations Air saved $1,500,000 in initial expenses alone. World Technology also provided accounting, advertising and promotion, while other airlines took care of baggage handling and assorted airport services. All of this enabled McDonald to keep his payroll under 160 people, which he estimated was 120 fewer than if the company had done everything itself. He constantly searched for ways to keep his organization as simple as possible because, he said, “the more complicated it gets, the more expensive it becomes.”

(The demise of scheduled service for Nations Air came in 1998 after a Valu-jet crash in the Florida everglades created a huge backlash against small startup carriers with the perception that they were unsafe from the standpoint of maintenance and training).

Try to get funded before you launch and get enough money so you can build momentum in the marketplace. Strategic investment from Fortune 1000 companies is often the best way to find the "cheapest money" you can get. In Southern California, more money has always come from this source than from VC firms. Many large technology companies are eager to make sizable investments in promising new startups. This brings with it valuable board members and new channels for sales and distribution. This method also often leads to a direct exit strategy.

There’s also a growing numbers of so-called “Angel” investors, wealthy individuals and technology-industry veterans (often one and the same) who relish the vicarious joy and respectable returns of providing early-stage funding for new companies.

We'll cover the Angels next. But first, Friday is poetry day!