Brother, can you spare a dime?

by Daniel in New York

Perhaps you're wondering how Eric managed to pay my salary. I certainly worried about it. After all, the little equity he had in his tiny Manhattan apartment would not keep us afloat for long.

Now, some startups are born with $100 million in the bank. They take on the business world by storm. Perhaps you have a scene in your mind as to how these startups are conceived. A budding young entrepreneur wraps up his business pitch standing in front of the overhead projection of an upward trending line-graph. A sparkle hits his eye at the exact moment he concludes. The lights come on. The VCs stand up, applaud, shake the entrepeneurs' hand. They'll pause for a photo op with a $100 million novelty check. Cameras flash. It's an American success story, really, a testament to what one can achieve with simply the power of their ideas.

Social Darwinist was not one of those startups. Social Darwinist has been fighting and clawing for funding since day one and the battle still rages on. Before the VCs enter the picture the startup's cash lifeblood comes from a much less orthodox investor classes: family, friends, and fools. These "three-F" investors are otherwise known as angel investors.

You know the conventional wisdom about (NOT) going into business with family? Well, that gets handily ignored when the CEO is desperate. Family's the first to hand over money when your ass is really on the line. A really close-knit middle class family can be counted on for $5-10k each. Your parents may kick in $50k if you're the upper-middle class type. Friends will do about the same, but without a genetic bond to hold you two together don't expect them to kick in nearly as much.

The last class, fools, is a bit of misnomer. If you're a gifted salesman you may be able to lift a significant amount of money from old pensioners. Unfortunately, the non-friend non-family investors in your company are anything but fools. They're more like mercenary VCs. They come in for amounts between $10-250k. What kind of person invests $250k in a strange startup? It's definitely not going to be a millionaire.

To a millionaire, $250k is nearly a quarter of their net worth. Have you ever met anyone who is comfortable gambling with 25% of their net worth? I have, but only because 25% of their net worth ended up totaling to $27.50, not $250,000. To get their hands on that kind of money, CEOs of startups need to angle for fish who are comfortable looking at $250,000 and fully accepting the real possibility that they'll never see it again.

These angel-fish come in three flavors:

* "Uncle" Ted. He's an entrepreneur just like the founder, except he's actually had success. Investing in the startup is sort of his way of reliving the thrill of his youth. He'll be a sage advisor and friend to the startup. When you guys make the exact mistake he warned about, he will be there not to say "I told you so" but to pat you on the back and tell you everything's going to be OK.

* Ruthless Tycoon. This guy might know what your business did if they listened to you finish your pitch. Instead, they'll express interest, leave the room, and summon their level 50 attorney equipped with Briefcase of Fury to close the deal. Their attorney will then proceed to savage your startup in ways you never thought possible by reams of paper. After the deal closes, the worst part is yet to come. Months, maybe years will pass without so much as a peep from Tycoon until one fateful day, when the startup is at its weakest, Tycoon's attorney reappears to strike maximum damage. You are wounded fatally. You die. Figuratively speaking. What actually happens is Tycoon gets cut in on more stock, or a better stock class, or whatever other punishment the trap his attorney set for you years before demands.

* Eurotrash Playboy. He was born born rich, wears all Adidas, and tours the world looking for A) girls to lay, and B) startups to invest in. Eurotrash Playboy demands regular status meetings but offers little in the way of constructive insight or criticism in how to run the business. In total, these guys work against their own financial interests by forcing the founders to indulge their ego-trips when they could be spending the time on meaningfully growing the business. The Eurotrash Playboyis optionally accompanied by a Mr. Smithers which handles all of the dirty laundry related to point A.

With funding secured for the next 3 1/2, 4 months tops, it's time to start building: The Prototype.