Expert Q&A: Startup Financing

Albert Martinez, leader of the relationship management team at Silicon Valley Bank, provides solid advice to entrepreneurs looking to raise capital:

What is your role at Silicon Valley Bank?

I primarily work with early and mid-stage software and digital media companies. Silicon Valley Bank works with innovation companies in all tech and life science sectors and regions across the US and in several locations around the world.

What is the biggest mistake startups make when they raise capital?

They focus more on higher valuation than finding the right partner who will help grow their businesses. A lot of times we see founders who seek money from funding sources where there is little to no additional value from that funding source. They want to retain more control of their companies rather than go another route with someone who has connections, understands their business and can really help them.

Let’s talk about bootstrapping. Does an entrepreneur have to break his own bank before looking for investors and other forms of financing?

If the entrepreneur doesn’t have previous relationships that they can leverage to get funding, they might have to contribute more of their own capital or sweat equity. That doesn’t necessarily mean breaking the bank. If they have the technical expertise to build something and can get traction, to build a product and meet milestones that make the business interesting to investors, that doesn’t necessarily need a tremendous amount of upfront capital.

What does ‘market validation’ look like?

User adoption, customers and revenue growth. Every market has different things. If a hardware company has a product that needs to be built in a box. We’d look for that hardware company to have a relationship with the box company. An app company would show user adoption and usage. Market and validation points will change with every venture. Show that people are using it, are willing to pay for it and investors will find it interesting.

How can you test market inexpensively?

You can host it on Amazon or a number of other providers and put it into the market to see if there is any adoption and get market feedback.

What will a bank require if it’s lending money for my startup?

For us, we are unique in that we do lend to pre-profit and pre-revenue companies. What we look for is either traction and performance of the business or funding from institutional investors that we know and are comfortable with.

Is there a funding of last resort?

What is wrong for one company could be right for another. There is a reason that these forms of capital exist. Do I see folks take the wrong form? Sure. There isn’t one form that I would say you should avoid at all costs.

What’s the recipe for good startup financing?

Finding the right investor/financial partner going forward. Fundraising is about more than just money. For every business there is not one right answer. You need to ensure that the investors or partners you choose are aligned with your long-term incentives. If you expect returns in five to seven years, and they expect it in 2 to 3, that’s probably not the best partner for you.

What are the typical reasons an applicant is rejected? Does ‘no’ mean ‘never’?

For us, we work with so many early-stage companies, they might not have had validation from the market they are pursuing or from investors that we work with. They lack validation – they haven’t had the proof points for the business. It’s too early. Absolutes don’t really apply; it’s rarely going to be “never” for most companies.

What other mistakes do entrepreneurs make when they approach financing their businesses?

I think that folks can assign too little or too much value to their initial data points and feedback. Meaning certain entrepreneurs believe they have the right idea and they hear stories about people being told “no” 20 times and then finally get a “yes.” So they don’t listen to that early feedback.

Likewise they don’t get feedback and adapt their product to the market. Sometimes folks are told their ideas won’t work so they scrap that idea and go back to the drawing board completely. Listen, and understand that experiences will affect what people think.

Be balanced in the way you take the feedback. If you hear the same thing from one or two investors, don’t assume all investors will feel the same way. That’s not always the case.

What words of wisdom do you have for startups?

When you’re looking to finance a company and you are wondering who to ask for advice, approach another entrepreneur whose company or firm has similar characteristics as yours and has been somewhat successful. Leverage your network and find someone who can validate what you work on and perhaps help with the strategy. It doesn’t have to turn into a long-term mentorship. Ask a question. Have a conversation.