Top 3 Sources of Early Funding for Your Brand
Where should I go for additional funds after my family? I get asked this question routinely, so I’d like to share the answer I recently gave on my PGS Live show. And it includes a counter-intuitive response you’re probably not expecting.
#1 – Seed – Virtually all consumer brand founders begin with some kind of seed capital, whether from their own assets or from friends and family. This is usually $100K or less, enough to fund initial production runs and not much else.
#2 – Seed again – When it comes time to bring in additional funds, the number one place to go for round #2 is back to anyone who gave you seed capital. Why? Their existing donation is a sunk cost. It makes them want to believe in your success in the early years. They invested in you and some notion of a minimal possible return. They were also willing to lose it all. And most likely, your business is still very unstable and not yet in Phase 2 ($1M+) of the Ramp.
#3 – Angels – While there’s nothing stopping you from obtaining rounds three or more from the original seed donor base, they may tire of helping out. This is the point when founders need to court high net worth individuals (or angels) who write larger checks in the six figures. The key is to look for them within your extended family first, 1st degree connections. They will be investing in you AND your product, not just you. At this point, you have no need or interest in institutionalized capital, including ‘new’ venture capitalists who might actually approach you. The ideal filter is folks who are NOT CPG industry experts or anyone who has a very strongly worded strategy they’re trying to pay you to follow with their check. Experienced VC or PE firms may have earned the right to have such strong opinions, but not angels. Be very careful who you get involved, because they represent your brand. The wrong person with the wrong demeanor will frighten away valuable investors later. It’s one reason why I recommend family offices as an important class of angels.
The importance of all three sources I just mentioned is that these are folks who structurally have long-term investment time horizons. This may not be true with venture capitalists and often isn’t the closer their current fund is to clocking out.
One last thing to consider is the amount you’re raising. Raising dry powder in advance of needing it is a pro move too few founders utilized. Whether it’s $150,000 or $1,000,000 you stash away, dry powder allows you to never raise in haste. Instead, you raise ahead of your need based on proven performance.
If you are new to the industry, the problem with this approach is that you have to have a lot of discipline to avoid squandering this money now. Having it on hand to cushion your cash flow in the future as you grow vs. spending it all immediately just to keep going is a difference you should think through as you set the amount you’re trying to raise early on from friends, family, or angels.