While I haven’t quite been in the early stage entrepreneurial scene lately from an entrepreneurs point of view, I’ve been working with many early stage startups on both their marketing/go-to-market strategy and corporate strategies (fundraising, biz strategy).
On the way into the city this morning, I was listening to Squawk Box on XM Radio and they had on air Elizabeth Warren who is the chairman of the congressional oversight panel on TARP. You can watch the interview here.
Elizabeth broke down investing into two main categories: relationship & numbers. Very simple: relationship as a category and numbers based as another category.
I’m not an economist and I certainly lack knowledge of the US Government (or any government for that matter) but let me try to explain something that she illustrated. The government has cut back on relationship lending, or lending to early stage businesses: loans, credit facilities, etc. The cut back on early stage lending is DOUBLE the cut to overall lending. Meaning, if you are a medium or large corporation, you have double better chance of getting money from the government than a early stage company right now. This hurts us in the long term: while many of these early stage companies may die, many will go on to be the big corporations tomorrow, and if we’re not funding them today, what will happen tomorrow?
The point of my post is not that of above but rather this:
Relationship lending is pretty much early stage investing. While I’m taking liberties and equating this to venture capital: early stage investors really have no numbers to look at… it’s all based on an idea and your relationship (either new or old) with a particular venture investor or angel. Relationship lending in the public markets is drying up as illustrated above (for now) but it seems that the angel scene and venture capital scene is hot right now. The most important thing for entrepreneurs to do right now is get out and meet/mingle with as many angels/connectors/venture folks as possible. Without a relationship, folks like Chris Dixon, Josh Stylman, Ron Conway, and Chris Sacca are not going to take a peek at you. Relationships are key.
Numbers based investing is where balance sheets are key. Strong numbers mean great leverage for the company when raising money. Because of the early stage nature of most venture capital/angel deals, numbers based investing is pretty much rare until you get on to Series B, C, D, and Mezzanine rounds. The public markets is all about numbers based investing.
So, if you are early stage and your raising money based on relationship lending my word of advice is to get out as MUCH as possible and meet/talk/mingle/get to know people and build a relationship. It’s not enough to be a “friend” on Facebook. Earn people’s respect.