8 Tips For Raising Money For Your Internet Startup

by Noah Goodhart

Over the past few years, I've made investments along with my partners in over a dozen internet companies through our seed investment firm, WGI Group. During this time, I've started to develop a good sense of the factors that contribute to an entrepreneur's success in raising money. I've put together this list to provide some advice to entrepreneurs that wish to go down this path.

1. Have a technical co-founder

Often the first hurdle an aspiring internet entrepreneur must face is finding a strong technical co-founder. If you are an engineer yourself, this is obviously not an issue, but in many cases, the "idea person" needs an engineer to actually build the vision. Anyone who has sought a technical co-founder knows how hard the process can be. Talented engineers are in short supply and high demand, and the best ones get pitched ideas all the time. But having a strong technical cofounder is an absolute requirement for most angel/seed investors. Sometimes entrepreneurs opt to hire a consultant and outsource the development. In my experience, outsourced technical resources can be very helpful once you already have a core team and need to expand quickly, but using an outside firm or individual from the start tends to cause problems. To investors, this often signals that you weren't able to convince a talented engineer to join your cause.

2. Start with your own money

If you have come up with the greatest idea since sliced bread, you'll want to start by putting your own savings to work. After all, the quintessential business story is that of the entrepreneur who mortgages his/her house in order to fund their dream. But, of course, you shouldn't make this decision lightly; rather, you need to decide how passionately you believe in the potential for your idea and your ability to execute it. Once you have decided to go for it with your own money, you'll be sending a positive signal to investors down the road that you aren't just looking to take risks with other people's money.

3. Build a prototype first, raise money after

A frequent and important issue among entrepreneurs is determining the stage at which you should raise money. In my opinion, you shouldn't seek outside investors until you have a basic prototype, or at the very least you have detailed screenshots of what you intend to build. Use whatever personal capital you can scrounge together to develop an initial version of your product or service, and then seek capital when are ready to move from prototype to launch.

4. Seek investors in a related field

When you are starting to search for seed investors, one of the first places to look is for other entrepreneurs who have been involved with successful businesses in the particular area you are pursuing. For example, if you are building the next great job site, then seek out entrepreneurs who have built successful job sites in the recent past. In my case, my background is in online advertising, and thus I'm often much more receptive to businesses in this space. This approach is good for at least two reasons: 1) investors with a background in your chosen area will be able to provide a lot of advice and strategic value beyond just the dollars they bring, and 2) the typical career path of entrepreneurs is often to spend at least part of their time seed investing after a successful exit, so you'll generally be approaching a receptive audience.

5. Network to seed investors

When you approach a potential seed investor, it is much better to be introduced via a common connection. With great online networking tools such as LinkedIn, networking is dramatically easier than it was in the past. But if you aren't able to network to someone and you need to initiate a cold contact, but sure to research the potential person and approach them smartly and with knowledge of their general investment interests.

6. Focus on execution

In my opinion, one of the biggest misconceptions about startups is that it is all about coming up with a great idea. The idea itself (or at least the initial idea) is generally not the most important factor in the success of a business. Far more important is the entrepreneurs ability to quickly execute. In my case, my firm is more likely to back an entrepreneur with an average idea but who is a great executor because we know that through superior execution, the entrepreneur will iterate and evolve their idea and business into something great. The importance of execution is well known to most angel/seed investors (since most angel investors come from the ranks of entrepreneurs), so win over investors by demonstrating how well you can execute, rather than trying to convince them of the greatness of your idea.

7. Solve a problem where you have a unique insight

Notwithstanding the emphasis on execution over ideas, you need to make sure you are solving an important problem. The best businesses tend to emerge when you experience a problem first hand and say to yourself "there must be a better way." Simply solving a problem generally isn't enough- you need to solve a problem where you have a unique or special insight and can offer a solution that isn't obvious to others.

8. Bootstrap

A common fact of life within a typical startup is that you are required to do more with less. It is very important to figure out ways to make a big impact with every dollar spent by your company. Keep salaries to a bare minimum and make up for it with stock option grants. Demonstrating to angels that you can stretch your funds is often a critical deciding factor.

Following the above tips should help increase your chances of finding outside funding. Of course, there is certainly no guarantee that you will be able to raise money. In my opinion, though, it's worth the effort, as there is nothing as rewarding as starting your own business. Good luck!

Noah Goodhart is an entrepreneur and investor in New York City and is currently a managing member of WGI Group. Previously, Noah was the co-founder of Colonize.com which was ranked as the 28th most visited website in the US in December 2000, and Smarter Ad Group, an early online adversing firm serving top clients such as American Express, BMG Music, and Paypal. Noah was also the first investor and Board member of Right Media, which was acquired by Yahoo! in 2007.