Raising capital for first-time founders
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Today’s question comes from Joe. I’m wondering how companies such as Tesla survive before Series A funding. How can you produce big, expensive products without having funding first?
Jake’s note: these episodes will be done through Facebook live from here on out and will be posted on other social media channels in video format as well, so if you prefer to get your content through different format, it will be available for you.
To start with, most manufacturing startups come in with founders or executives that have a track record of success, so they are able to get millions of dollars of capital upfront from investors based on that history.
A good example of this is Elizabeth Holmes of Theranos. She was ready to start raising more funds for another company before she was sanctioned, and she could have done it because she had a track record of being able to build a company and to raise large sums of money along the way.
Upfront investment can be a roadblock for first-time founders
First-time founders aren’t generally able to raise the type of funding necessary for startups with big initial costs, but there are a couple of options.
Partnering with large companies. Partnering with a large company that can provide that funding and track record can be a good starting place. However, you will likely give up a lot more of the rights to what you are building and a large percentage of ownership, too. If you have advisors or mentors (or have other ins) in that space, you could go this route.
Pitch potential business partners. If you can find a co-founder who has a track record of success, then you could pitch the idea to them so they could provide the track record you need to get funding. In this case, they have a lot of leverage because they know you won’t be able to build your company without them. It’s not a bad thing, but you have to be prepared.
If you have a choice, it’s better to build something that doesn’t require a lot of upfront capital. If you really want to do something that requires a lot of funding, then starting with something you can build as a first-time founder that you can then successfully exit will only serve you better down the road.
“Don’t start a businesses that requires a lot of upfront capital if you are a first-time founder. Start with an idea you can build and grow without outside investment and then successfully exit. That will give you the leverage needed to find upfront funding for your next idea.”
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