The following is from
Ask The VC, where Brad Feld and Jason Mendelson of
Foundry Group answer questions related to venture capital investment and startups:
Q: I am part of a tech start-up that's in a slight conundrum.
In order to place our product in its market, we've had to provide it to
customers free of charge. Now, the majority of our revenue model is
based on advertisement fee's and service fee's collected after the
product has already been placed, so normally such a move would not be a
problem; however we are finding it hard to raise the money to produce
and install our first product.
To date we've raised
money from angel investors. When we approve VCs, we get the same
reply, "let's first see a market reaction, and then we can talk about
investment." But, without VC money, we can hardly demonstrate a proper
market reaction.
Should we concentrate on finding more angels, or should we look harder into the VC option?
A:
(Brad) Concentrate on finding more angels. You are in a classical
circular discussion with the VCs you are talking to. Without knowing
the details, my guess is the VCs you are talking to are basically
saying no to you, without saying no directly. You can waste a lot of
time continuing to go in circles with them, or you can focus your time
and energy on getting enough angel money to get to the next step of
your business.
It is equally important that you re-evaluate
exactly what you are trying to accomplish with the angel money.
Assuming you believe you'll ultimately need more capital for your
business, at some point you will use up your sources of angel money, or
you'll get to a place where you need a larger capital infusion that
angel investors won't be able to provide. Given the feedback you are
currently getting from VCs, you should rethink the approach you are
taking to enter the market to demonstrate the elusive "market reaction"
the VCs are looking for. If you feel like you've developed a good
relationship with at least one of the VC firms, see if you can enlist
them to give you direct feedback on what they'd need to see (other than
the generic "market reaction") to take you more seriously.
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