How to Raise Capital for Your Startup Company
Dan Reed of American Family Ventures shares insights on raising capital.
It’s no secret that launching a start-up takes bold vision, meticulous planning, and at the end of the day, a lot of guts.
It also requires capital, which can be tricky to obtain at the early seed stage. But fortunately for you, we’ve got some helpful ideas for successfully seeking funding from venture capital firms.
We talked to Dan Reed, managing director of American Family Ventures, American Family Insurance’s venture capital arm based in Madison, Wis. As a former entrepreneur himself, Reed shared his real-world insights about what to do, and what not to do, when you’re seeking funding to fuel your start-up dreams.
What are the most influential factors that convince you to fund start-ups?
It’s got to be relevant to where the industry is headed. For example, at American Family Ventures, we support early stage, innovative, data-driven companies that create digital connections to enhance everyday safety and quality of life – which is crucial to the future state of the insurance industry. Also, the start-up has to demonstrate its team has the right expertise, strategic thinking, cohesiveness and tech-savvy abilities to execute their plan over the next 10 years or more.
And, you’ve got to show that it’s needed, it’s real, and you’ve got to offer proof that it’ll succeed in the marketplace. Data or metrics proving actual market demand can really make a difference when it comes to convincing investors.
Seems like it could be a challenge to get metrics demonstrating demand, especially if it’s a new product concept, right?
It may not be as hard as you think. You can get basic metrics measuring demand with Google’s AdWords research tool, simply by determining how many people are searching for your product or related concepts. I know of people who run Google ads and get people to sign up to be on a waiting list for their future products. Some may use email surveys to demonstrate the need or demand for their product concept. When start-ups show evidence like this, it strengthens their case for receiving funding, and helps reduce the sense of risk that a venture capital firm or accelerator might have.
So, what should start-ups avoid doing when seeking funding?
Start-ups often forget they’re talking to people during their funding pitch. They’ll take a few minutes to make introductions and break the ice, and then they’ll launch into a 20-minute presentation without any breaks or input from anyone on our team. It’s easy to understand their passion, but they get so wrapped up in their story that they forget they’re trying to build a partnership with us. It’s got to be a dialogue, not a monologue.
Having been a successful entrepreneur yourself, what lessons would you share with others?
You need to navigate that fine line between hitting milestones and sustaining the business while going after big opportunities to justify additional capital. Start-ups often focus too much on tightly managing risk. They also need to keep swinging for the fences — such as scaling to bigger markets or capitalizing on disruptive technologies.
Another factor to consider is that if you’re launching a start-up with friends, it could turn your friendship into more of a business relationship. It can be a good thing, too, but it’s something to be aware of. It helps if everyone is transparent, understands their roles, and respects each other’s expertise and contributions.
And finally, bringing a start-up from concept to market is a marathon, not a sprint or even a series of sprints. While you might initially envision getting everything off the ground in a year or so, it could take a lot longer than you think. As the saying goes, ‘Overnight success takes 10 years.’
Want more insights on funding your start-up? Check out our interview with Michael Seibel, a partner at Y Combinator, a Silicon Valley incubator that funds early-stage ventures.