Recently I was approached by a startup founder who asked me, “What are your top three learnings to raise seed for sextech?”
I took a deep breath as my thoughts drifted to how I could answer the question with encouragement instead of bluntly telling them, “The biggest thing I’ve learned is that startups have a challenging time raising capital.”
Multitudes of companies fail because they can’t raise capital. Or they raise some money but then cannot raise more.
It’s not just adult, however. Mainstream startups also struggle a lot. Multitudes of companies fail because they can’t raise capital. Or they raise some money but then cannot raise more. In a recent study, 29% of mainstream startups listed lack of capital as a reason for failure.
That is why most founders rely on cash savings, friends, family and other high-risk ways of funding their startups — like credit cards, yikes!
Private equity does find its way into adult. Some notable companies, like Mindgeek and Reporo, were accelerated with large amounts of private equity, but those are exceptions, not the rule. In most cases, adult companies should consider almost every venture capitalist and institutional investment fund “out.” They believe adult businesses taint their entire portfolio, and banks don’t like it, either.
You will only raise from mainstream VCs if they are interested in adult, no matter how great your product is or how many billions you say you’re going to make. It doesn’t matter. What matters is finding people who want to invest in what you want to do. Seek out investors who are a good fit and interested in your vision.
Investors Attract More Investors
There is a “schooling” effect with investor circles and venture capital firms. It makes and breaks startups, though it’s only sometimes an indicator of a good idea. Until somebody wants to invest in your startup, nobody wants to invest in your startup. As soon as someone believes in you, other people will suddenly invest because they think they’re missing out on something.
For example, one of the founders I know had raised early money from a notable angel investor. I became their second major investor — and I won’t lie, this previous investor was a factor in my decision to invest. They went on to get accepted into prestigious accelerators and incubators afterward. They later received an investment from one of the most popular social media networks in the world. They raised a round at approximately a $25-million valuation a few months ago. Of course, this was a mainstream company, not adult.
This is what the “schooling effect” looks like in angel investing, often causing FOMO responses from investors and VC firms alike. Because it generates traction with investors, “schooling” causes enormous amounts of money to get invested into a minority of startups. Most startups never reach that level of traction. Angels are often susceptible to this effect, even though incubators and inventor groups warn of the dangers of it.
The lesson? It helps when you have notable investors, at any check size. They become your influencers and endorsers.
Raise From Multiple Investors
Disciplined investors usually limit how much they will put into a startup. They’re prepared to walk away if it doesn’t work out, even if it means lighting the match that torches the dumpster fire. However, when cash gets low, there is enormous pressure on undisciplined investors, who often suffer from the “sunk costs fallacy,” a belief that putting in more money will ultimately pay off. Spoiler alert: it usually doesn’t. I’ve had to say “no” multiple times, which ended businesses. Most of the time, it came down to poor execution on the founder’s part, and investors don’t take that kindly. Also, as a warning, if you only have one investor, you are at their mercy in negotiations.
For the sake of risk management, you should have more than one investor. Use your early investors to attract more investors, and raise long before you need the capital. When your bank account is empty, it is too late to start looking for a cash injection. If you haven’t performed or done what you’ve said you would, your existing investors may not throw you a lifeline. You will drown without it.
Copycats Struggle to Get Funding
Everyone and their brother is building the next model creator platform, webcam platform, advertising network, cryptocurrency or NFT platform. We see this phenomenon all the time in the adult industry. Someone observing this once told me, “This industry doesn’t innovate.” Plenty of examples prove otherwise, but it’s true that copycats often lack purpose or the ability to solve problems better than strong and established incumbents. They are built and exist because the founders see an opportunity not to build a better product, but to make money. The need for a new product or service is not there, and it’s why most investors ask about competition and do their research before writing a check. Copycats often fail to grow beyond competitors, and many fail because they cannot provide true innovation when they are only followers.
For example, there are already a billion sex toys out there in every shape, size and orientation. If you want an alien cock or a dildo that looks like a stitched-up zombie cock out of Frankenstein, they’ve got you covered already. That means the “next big thing” in sex toys really only comes along very rarely.
The bottom line, whether in sex tech or any other sector, is that whatever you’ve got needs to be good. If you don’t solve a real problem or provide significantly higher value than what is already in the marketplace, then pursue another endeavor instead.
Juicy Jay is the CEO and founder of the JuicyAds advertising network, as well as the founder of Broker.xxx, which helps people buy and sell adult websites and businesses. He also provides executive consulting, business strategy and marketing services at Consulting.xxx.
