When to raise money?

Fred Wilson has a good post about what it takes for Union Square Ventures to fund a company. It is always good when VCs are clear on what they are looking for – it makes the entrepreneur’s job so much easier.

While I agree with Fred that the cost of entry is going down, it is all relative. If you are a young entrepreneur with a job, mortgage and maybe a kid, do you quit and just take the risk or do you get a working beta (while at your current job)?

A friend was recently in this situation — he and his partner had a pretty good beta of a product I would use. It was in a crowded space, but the execution was very good and it had those key product touches that could make it the breakout product. My friend was ready to quit to do this full time. He was willing to take the risk and didn’t want to take someone else’s money till he was comfortable there was traction. The partner however wanted the security of some angel funding to quit his job.

With Web 2.0 apps and the whole “cost is going down” argument, even angels want to see traction before they fund a startup. What is the right way for an entrepreneur to proceed?

  • Let the partner willing to take more risk get a bigger stake on the company. You’re not really an equal partner unless you’re willing to put in as much as the other person… and the equity structure should fully reflect that. On one hand, you could say that could mess up the partner dynamic, but on the other hand, the reality that one person doesn’t believe in it and the other person does has probably altered their partnership anyway.

  • Shripriya

    So, they eneded up at that point (where one person gets a bigger stake). Did change the partnership dynamics. Not sure if they can work their way around it.

    Emphasizes the fact that you should pick your partners carefully. Hopefully someone you know pretty well or at least someone who you know well enough.

  • Krishna

    Might want to make the links open in a new window/tab. I love the links but it moves me away from this awesome blog 🙂

  • Shripriya

    Good point – fixed. Thanks for the compliment!

  • libertarian

    Good question. Charlie’s answer nails it. It truly is amazing what you can do for $1000 these days. Am discovering this as I embark on something new.