When startups shouldn't ask venture capitalists for money

It's always reassuring to know a few investors that will fund your startup, but in some cases, talking to them too early could affect a startup's chances of getting money in the first place.
Written by Michael Lee, Contributor

Raising Series A funding is seen by many entrepreneurs as the first round of investment that will ultimately let them realise their dreams. But when should startups start talking to investors about the money issue, and is there such a thing as doing it too early?

Speaking at SlatteryIT's Tech Connect 2013 event in Sydney on Thursday, Shoes of Prey co-founder Jodie Fox and ImageBrief chair Anthony Pascoe shared their stories of how their startups sought funding.

The two startups are now at slightly different stages of funding. After bootstrapping the business for its first few years, Shoes of Prey last year landed its Series A funding of $3 million from investors, including US venture capitalist and kiteboarder Bill Tai, Atlassian founder Mike Cannon-Brookes, and CrunchFund.

ImageBrief, on the other hand, has raised several smaller rounds of funding, including $700,000 from Square Peg Ventures on Thursday. It has so far raised $2.2 million, which includes an investment of $600,000 last year from anonymous investors that heard of ImageBrief from Innovation Bay. It is now looking to raise its own Series A round in the next nine to 12 months.

Although Shoes of Prey has its funding now, looking back, Fox said she and her co-founders probably shouldn't have started the investment discussions as early as they did.

"We started [bootstrapping] in October 2009, and in November 2009, we were finalists for the best bootstrapped startup for the Crunchie Awards, and that attracted a lot of attention from VCs who wanted to know what we were up to," Fox said.

"It created these very long conversations with no real strategy or thinking on our part of what that might look like when it came time for us to actually get capital in the door. That can make a deal feel a little bit old as well by the time you're ready to do it."

Fox did say, however, that the connections and ability to gain insight and advice from investors was more important than just the money.

Pascoe also advocated being cautious about jumping into investment talks too early, but re-emphasised Fox's point about building connections.

Last year, the company began talks with VCs on both the east and west coast of the US that they considered to be "targets" for its upcoming Series A round.

"Our rationale was not to go and see them and try and pitch and try and secure capital out of those first interactions, but really, just to open the relationship accounts, get into a position where we could get a clearer view as to who would really be attractive and value-adding to us as Series A investors, and keep those more relevant relationships and prospects warm and educated on how we're going."

Although time will ultimately tell whether ImageBrief's strategy will pay off, Fox said that it was certainly the same experience that Shoes of Prey appears to have been through.

"The people who participated in our Series A; some of those were people who we had these long 'romances' with before we got to closing the Series A round," she said, adding that, although keeping those networks alive could be a significant "time suck" and distracts from the business' key focus, it was important to keep the right relationships warm and continue networking.

"We have such a generous community for entrepreneurs, and that's [including] the VCs here in Sydney, as well as angels. If there's someone that you want to speak to, the chances are, you can get half an hour with them," Fox said.

This has also been Pascoe's own experience with the startup community.

"Once you start networking in the sector, [and] you can demonstrate some capability and some integrity and some genuine intent, people are quite keen to help you," he said.

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