Phil Shmerling on Four Ways to Raise Early-stage Money

Phil Shmerling is the founder and CEO of InCrowd Capital, a company that helps early stage entrepreneurs brings in investors. We sat down again to go more in-depth about his work at InCrowd. Check out the interview to hear his thoughts on four ways to raise money — venture capitalists, crowdfunding, bootstrapping and organized capital – and his main message to entrepreneurs. You can also find some highlights below:

Here are a few quick highlights from the full conversation:

Clark: You said that only 1% of entrepreneurs are getting needed funds from venture capitalists [VCs]. Does that surprise people?

Phil Shmerling: Yes it does, and I think that generally speaking, it’s more so the case in the southeast. Now if you’re out in California or New York in today’s environment where things are booming, then it might be possible to get a little bit of money when you have just an idea, depending on who you are and how knowledgeable you are about the space. If you’re a college kid coming out of school with an idea, you might have more difficulty than if you’re someone with 10 years of experience in an industry and you’re launching a product or an app that can disrupt that industry. In that type of case, an idea can get funded by a VC. But when you’re looking at the southeast specifically, it’s very difficult to raise venture capital money. It brings up the dreaded T word- traction- which a lot of entrepreneurs hate hearing. But I define traction as proof that you can execute. You can’t just have a good idea. Coming up with a good idea is difficult, but once you have it, the difficult piece is executing on that idea.  Venture capitalists want to see that you know how to execute.

Clark: If you had to boil down all your thoughts from today, what would be your main message that you want to leave listeners with?

Phil: To entrepreneurs who are out there thinking, “Hey I’ve got this great idea, I’m going to go out and get funding and build a product,” be prepared for how difficult it is. Everyone says that starting a company is hard. I think my unique viewpoint on things is that yes, I am on the investing side running an angel group, but I’m an entrepreneur too. I started my business, I had to get customers. So I’ve been through a lot of these realities and the reality is that it’s not hard to start a company, it’s impossible. And if you aren’t truly passionate about the problem you’re solving and really loving the work you’re doing, it’s so easy when you hit that wall- and every entrepreneur hits that wall- to go chase the next opportunity or to go try something else. So if you have the attitude, “I’m going to try this and if it works, great and if it doesn’t, I’ve learned a lot,” you’re already setting yourself up for failure. You’ve given yourself an out. You have to really believe in what you’re doing because it’s really difficult to start a company. No matter how good your idea is, it’s still going to be very difficult to sell it and very difficult to build it and execute on the idea.

Clark: What do the first meetings you have with people usually look like?

Phil: I like to meet entrepreneurs really early to see the ones who are going to stick with it. If they’re coming back to me every couple months for a year or two and they’re making a lot of progress and they’re still passionate about it and not burned out- which is a big risk- those are the types of entrepreneurs I like to meet and keep in touch with. For me, the companies that we’ve funded, I’ve probably known the entrepreneurs on average a year if not more. So I like to meet the companies pretty early, and I think entrepreneurs should be reaching out to investors early. There are VC’s out there who you say, “Hey, here’s my meeting, here’s my pitch, here’s how I’ve done the past two years”, and they’ll write you a check. That’s not the way I operate. I don’t think that’s the best way to be successful as an investor- to get a bunch of business plans and say, “I’ve got two months to decide, here’s money.” I think it’s a long process. I like to meet the entrepreneurs very early in the process and by the time they’re ready to raise organized capital- which is where I’d say we fit in- then they’re going to come back to me.