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4 tips for raising a successful seed round of funding

(Business Finance) After seeking a seed round of funding, one entrepreneur learned some difficult lessons and offers a fresh insight into the process.

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I couldn’t believe what I’d just said.

I don’t think my boss could either, so I repeated “That’s right, we just got a $50,000 check for my new startup and I’ll be leaving in a couple of weeks.” I was on cloud nine. Our funds had just hit the bank and I was on my way to fulfill my entrepreneurial dream, but it wasn’t always this way.

Here’s what I learned through raising a seed round of financing.

1. Have a product and market penetration

In today’s tech landscape if you can’t put together your first product and get some decent validation working out of a garage, dorm room, or basement you are going to have a rough go at raising any good money. When we approached our first investors we already had a product with about 2,500 people using it in our target market and we were growing rapidly every month without much paid advertising. Growth and penetration is so key to raising money. Investors know it’s difficult to do all of this without funding, but that separates the doers from the people that only have an idea.

2. Don’t be afraid to turn people down

Our first “nibble” from an investor was the kind of offer that feels a bit more like an insult, but we didn’t know if we could do better so it was tough to turn it down without a lot of other options out there. We did turn down that offer and we’re glad we did. Our next offer had double the valuation and a lot better investors behind it.

While we were considering this afore mentioned offer I called a board member from my previous company to ask his opinion about that investor. He invited me to his offices to talk about it and ended up writing us check a few weeks later. We didn’t know what a round would look like yet so we agreed on a convertible note for $50k. He liked our idea and started sending me to pitch his friends. They were all kind and told me I could come to them with strategic questions in the future but most said that they weren’t investing at the time.

I reached out to a few investors per week and was networking the best I knew how while working late nights to keep working on our product and marketing efforts. I kept in close contact with the investors that said I could go to them with strategic questions as I continued to reach out to new potential investors. Eventually one of the investors I contacted wrote us another $50k check, but we were still $400k shy of our target seed round. When the new investor came onboard I reached out to those that said I could come back with “strategic questions” to tell them about the exciting news. In short order a few of them wrote me checks as well.

LOOKING BACK: As I look back on this time I have identified a few keys to my success. The first was building good relationships. When I got turned down I maintained as close of a relationship as the potential investor was okay with. That is where most of our money came from. We also had to have good growth, so I couldn’t leave our business behind while raising. When you have a small team you have to continue to grow your business despite the demands on your time to raise money because the people you are raising money from care about your growth.

Once we had 4-5 investors onboard I would get an occasional meeting setup with an angel that wanted to invest in a hot tech startup. Our investors would refer that angel to me, we would talk for 30 minutes, and they would cut me a check in the next few days. These were the good days, but I started to get worried about taking in too much capital and diluting ourselves as founders.

3. Raise money when it wants to be raised

At this point in the fund raising process one of my investors taught me a valuable lesson. As I struggled with whether or not we actually needed more money I gave our lead investor a call to discuss the matter. He laughed a little at my dilemma and said, “Jordan, you raise money when it wants to be raised.” What did he mean? You’re not always going to be the hot company that everybody wants to be involved in. There will be ups and downs. You’re worth more during the up swings. Take the money then, and take as much as you can, within reason.

4. Startups fail because they run out of money

Speaking of taking in as much money as you can I thought I would share this last tidbit on how to think about money as a startup. One day while speaking with one of our investors he mentioned a recent conference he had attended. At the conference a question came up that he gets asked regularly. The question was, “Why do startups fail?” His answer? “Because they run out of money.” I know, it’s super profound! But while it might sound a bit obvious I think there’s a lot to be said for his answer. I firmly believe that most startups can be successful given enough time and resources to pivot and nail a product and market. The problem? One day you’re going to fail if you run out of money. As a founder you have to watch your resources like a hawk and raise as much money as you can. You have to do amazing things regardless of the limited resources, and you need to make sure your company has enough resources. You have to be scrappy.

There are so many other things that go into the process of getting a startup off the ground including achieving product-market fit, building a great team, designing and building product, creating an investor presentation, identifying and understanding your market, growth hacking techniques, and more. Stay tuned as I share what I have learned about these topics through my experiences being a product manager at a small B2B startup that was acquired in December of 2011 by Proofpoint (now a publicly traded company), and starting my own consumer-facing business that is currently disrupting the student housing search.

Most recently Jordan was the Co-founder and CEO at Unbill - a FinTech startup that was acquired by Q2ebanking (QTWO) in January of 2017. Before that, Jordan was an early employee and product manager at NextPage which sold to Proofpoint (PFPT) in December of 2011. Jordan is happily married and has 3 children.

Business Finance

Politicians reconsider PPP rules too cumbersome for small businesses

(BUSINESS FINANCE) The PPP loans may have some changes coming soon, to help small businesses even more by extending the time they have to spend the money.

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Congress has reported talks over fixing parts of the Paycheck Protection Program (PPP), a key program designed to help businesses during the coronavirus pandemic. Changes could range between small tweaks to an overhaul of program requirements. Congress remains divided over a phase four relief bill (passed in the House last week) which includes several of those PPP changes.

The PPP was created to provide forgivable loans to businesses with fewer than 500 employees. Although the Treasury is continuing to offer updated guidance, any significant changes will require approval from Congress.

One of the major potential changes is an extension to the eight-week time frame for businesses to spend their loan money. Senator Marco Rubio (R.-Fla.) is advocating the change. He told reporters “I think the more important thing to change is the time frame in which they can use it for,” Rubio told reporters. “We do need to give them more time to spend those monies.” The hope is to pass those changes before the first PPP loan recipients reach their deadline in early June.

Other changes proposed in the House bill include extending the spending time period to 24-weeks and eliminating the requirement for 75 percent of loan spending on payroll in order to qualify for full forgiveness. The flexibility could allow recipients to allocate money towards rent, another challenge facing small business owners. While Senate Republicans haven’t shot down that option, they’ve voiced concern on the spending rule which was originally designed to keep workers employed. Meanwhile, Democrats argue for flexibility which could support businesses with fixed costs. Both sides are open to discussing a 50 percent payroll and 50 percent additional cost breakdown in a new PPP changes.

The Small Business Administration has reported $195 billion from the $310 billion of the second tranche of PPP has been approved. With no defined plan to reopen the country, small businesses are counting on relief programs. Senior White House advisor Kevin Hassett has said the government can’t continue to lend money to businesses indefinitely. “It is something we can do through Jun, I would, guess if there’s enough cash for that.”

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Business Finance

Unless you call your representative, the IRS will be forced to screw PPP recipients

(BUSINESS FINANCE) Small business owners, can your Covid-19 loans really be forgiven? “Free money” never sounded so good…or bad. The CARES act missed a vital tax hole.

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The Paycheck Protection Program (PPP) portion of the Coronavirus Aid, Relief, and Economic Security Act (CARES) was hailed as a revolutionary life line to small businesses that had to shutter their doors against the plague.

Basically, the Feds said: Keep your expenses up, pay your staff so they don’t have to go on assistance, and not only will we loan you the cash to do so, so long as you can prove it was spent stimulating your business, we’ll not only forgive the loan, it won’t be taxed as income.

Right said, Fed. But some sharp-eyed readers of the letter of the law say they’re too savvy for these loans, and here’s why.

It was announced on April 30th that anything paid with PPP payments won’t be tax deductible.

Specifically, the IRS says, expenses that qualify a business owner loan forgiveness cannot be deducted from 2020’s tax filings, in order to keep people from getting “double tax benefit[s].” You can read up on the tax code citations and legal precedents right here, straight from the tax horse’s mouth.

So what’s happening here is you can “enjoy” free money from the government, but if you were counting on it being non-taxable income, then you’d best count again.

I may be a simple country (adjacent) April, but is the purpose of handing out money somehow… NOT to put business owners AHEAD?

This move strikes me as a ship throwing someone in the water a life-vest… then sailing off without reeling them in.

‘Well you don’t want people to double-dip,’ is a rebuttal I’d expect. Or ‘that’s how the CARES Act was written,’ but right now we’re dealing with people and their businesses needing EXTRA. Not ‘a bit,’ not ‘enough,’ but quantifiably EXTRA help in order to do better than just tread water. We NEED that extra dip… and individual bowls for everyone while we’re at it.

“No half measures,” as a wise, narcissistic fictional criminal once said. Brian Cranston won an Emmy for delivering that line, so I figure it’s stand-by-able.

As of right now, there’s not much that can be done except for business owners to gather and lobby their representatives en masse to alter the language of the CARES Act, or add an amendment to it that allows the IRS to let the deductions business owners need to slide.

As is, strict interpretation of the law doesn’t give our beloved agents enough wiggle room to LET this money be deducted. And I’m guessing that the IRS isn’t really the type of agency to DO interpretative judgements as a matter of course so… the ball is in Congress’ court on this one.

Fortunately, it seems like they’re taking it and running with it!

On May 12, a bill aptly named the HEROES Act was proposed in the house, and it clarifies: “For purposes of the Internal Revenue Code of 1986 and notwithstanding any other provision of law, any deduction and the basis of any property shall be determined without regard to whether any amount is excluded from gross income under section 20233 of this Act or section 1106(i) of the CARES Act.”

They’re reaching past the last stimulus bundle (that I haven’t received my share of yet by the way, cough cough) with a total of three trillion as a distribution goal. That’s a three followed by twelve zeroes, sweeties. And this is all cold, hard, tax free, DEDUCTIBLE cash.

My advice here? Get your letter-writing hands ready, business owners! It’s not a law YET, so keep pushing your politicians as best you can, and telling your friends, (and sharing our articles) And best of luck.


Sidenote from the Editor: Research for this story includes insights from Caleb Ellinger at Ellinger Services (CPA wizard (our word, not his) in Austin who is very well known as serving startup and freelance communities).

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Business Finance

Companies seek brownie points by returning PPP cash they shouldn’t have applied for

(BUSINESS FINANCE) It turns out some large national companies received millions of dollars of the PPP loans that were pitched as for small businesses, what gives?

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The CARES Act, passed last month in response to the COVID19 pandemic, allocated over $370 billion to small businesses in the form of PPP loans. The Paycheck Protection Program (PPP) was hastily ran through Congress, with many of the small details left for the SBA, IRS and other entities to iron out, even though the legislation was over 800 pages.

Now, Bloomberg is reporting that many small businesses are returning loans as the Trump administration issues new guidance for these loans.

PPP loans- confusion over eligibility, rules and restrictions

The PPP was designed to incentivize employers to maintain payroll through the pandemic. The law’s intent was to help small businesses, non-profits and smaller organizations without other resources.
Within just a few days, the money was exhausted.

As Congress allocated more money for the program, it came to light that many larger businesses made requests for the money. Shake Shack, a national chain, received $10 million. Ruth’s Chris steakhouse received $20 million. Even the Los Angeles Lakers received about $4.6 million through the PPP. It should be noted that each of these entities returned the money. Technically, each of the entities qualified under the PPP, too.

Treasury Secretary Steven Mnuchin and the SBA announced that all PPP loans over $2 million will be reviewed to ensure borrower eligibility. The SBA continues to provide guidance for the PPP loans. One financial expert likened it to building the plane while it was still in the air. Some companies are receiving guidance that no publicly traded companies qualify, even though these companies have received PPP funding, and some intend to keep it.

If a company doesn’t qualify for the PPP, they could face criminal charges for making false certifications on their loan applications. This could include statements that indicate the PPP funding is necessary to support ongoing operations.

Return the PPP money or not?

The SBA is giving borrowers a deadline of May 14 to return PPP loans without any legal trouble. Some companies are returning the money, not only because of public backlash, but to avoid problems. The government is sending a message that it will be vigilant over the use of PPP funding. There are still so many questions about how the loans will work and will be forgiven, it pays to tread carefully if you’ve received more than $2 million in funding under PPP.

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