Made might be the wrong word here. Raised is more like it.
You see, when Matt and I first launched Crowdability, we raised $1 million from investors to help grow our business.
From start to finish, it took us 21 days to pull together the entire investment.
Relatively speaking, that’s a short amount of time.
And to be clear, I’m not telling you this to brag—because, frankly, the first time I tried to raise capital, I failed miserably.
Let me tell you the story about why I failed...
Hopefully, whether you’re an entrepreneur or an investor, you can learn something from my early mistakes.
The Dot-Com Days
I launched my first company back in 1999, at the height of the dot-com boom.
At the time, wherever you turned, someone needed help building a website.
Although I’d never taken a Computer Science class, I’d always been interested in technology. So I taught myself how to “code”—in other words, how to build software and websites—and then I spread the word that I was available for hire.
It didn’t happen overnight, but one client led to another—and before long, I had a real business.
Since I couldn’t handle all the work myself, I hired a few employees, and then a few more.
But the best ones were expensive, and I was hesitant to hire too many folks before I had enough projects to keep everyone busy.
But then I had an idea...
Raise "Seed Capital"
If I could raise $500,000 or so from investors, I could hire enough employees to bring on bigger and better clients—and even if I didn’t have enough work to keep all my staff busy right away, I’d have a cushion.
I estimated that within 18 months, my new employees would start bringing sizable profits to the bottom line.
So I spent a month writing a detailed business plan and creating financial forecasts.
Then I hit the road to raise my seed capital.
Not What I Was Expecting
But closing investors turned out to be far more difficult than closing deals for website work. I can’t tell you how many times I heard the word, “No.”
Over time, however, I realized that people were saying no to my investment deal for three consistent reasons. And as I’ll explain in a moment, this understanding has made me a better entrepreneur—and a better investor.
1. “Services Business” — In general, professional investors don’t like services businesses like the one I had. Unlike a software business, services businesses don’t “scale” well.
With software, you build your product once, and sell it over and over again. Since your costs are relatively fixed, as you sell more, your profit margins go up.
But with a services business like mine, the more you sell, the more people you need to hire. Your margins stay flat.
2. “Lifestyle” Business — Investors in start-ups tend to make money in one of two main ways: either the start-up goes IPO, or it gets acquired by a larger company.
And generally, these outcomes only happen if the start-up gets big, fast.
My business wasn’t intended to have that level of scalability or quick growth. I was hoping to gradually expand to thirty or forty employees and run a small, profitable business—a business that would provide a good income for my team and me.
Professional investors have a name for that type of busines: A “lifestyle business.” This is an enterprise that lets the entrepreneur and his staff live comfortably—but it’s not the type of business that goes IPO or gets acquired.
3. This is a “Fad” — At the time I was raising money, people still didn’t know what to make of the Internet. Many of the investors I pitched thought it was a fad—an industry without “staying” power.
Shortly after I started fundraising, the dot-com bubble burst—and my business went down with it.
But even if it hadn’t burst, I’m not sure I would have been able to raise money.
You see, I was trying to raise capital for a lifestyle/services business. I shouldn’t have expected VCs and angel investors to be banging down my door.
But as tough as the experience was for me as an entrepreneur, it’s been invaluable for me as an investor:
Avoiding start-up investments in lifestyle and services businesses has saved me a great deal of time and money.
I also learned that even the smartest investors sometimes make bad calls.
So if you’re entrepreneur, don’t beat yourself up if you can’t convince someone to invest in your idea right away...
And if you’re an investor, don’t beat yourself up for early-stage deals you said “no” to because they seemed like fads (for me, Uber and Twitter come to mind).
By the way, Matt and I have been running a special survey this week—
It’s for entrepreneurs who are trying to raise money for a new or existing business.