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how to fund a startup
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how to fund a startup
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The due diligence discloses no ticking bombs, and six weeks later they go ahead with the deal. Here are the terms: a $2 million investment at a pre-money valuation of $4 million, meaning that after the deal closes the VCs will own a third of the company (2 / (4 + 2)).
In the real world, VCs regard angels the way a jealous husband feels about his wife's previous boyfriends. To them the company didn't exist before they invested in it.
Terrible things happen to startups when they run out of money, because they're designed for growth, not adversity.
But the most unrealistic thing about the series of deals I've described is that they all closed. In the startup world, closing is not what deals do. What deals do is fall through. If you're starting a startup you would do well to remember that.
Birds fly, fish swim and deals fall through.
Why? Partly the reason deals seem to fall through so often is that you lie to yourself. You want the deal to close, so you start to believe it will. But even correcting for this, startup deals fall through alarmingly often-- far more often than, say, deals to buy real estate. The reason is that it's such a risky environment. People about to fund or acquire a startup are prone to wicked cases of buyer's remorse. So if you're a startup founder wondering why some angel investor isn't returning your phone calls, you can at least take comfort in the thought that the same thing is happening to other deals a hundred times the size.
To get a complete picture, just add in every possible disaster.
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