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How can I fund my venture?

Picture representing general FAQs

Introduction

Money is the life blood of any business. You need it to get started and to grow your business. Ideally, you hope your business requires little investment and is immediately profitable., but since that seldom happens, you have to develop a financial strategy that is realistic and funds your venture during its various stages of growth.

Each of the following funding sources has its own benefits and risks. You need to decide which form you want to use and possibly how to mix and match them to get the cash you need when you need it.

Risks

Regardless of how you get funding, you need to be aware that:

  • You need to be incorporated in some fashion.
  • In getting funding, it is almost always essential to establish a relationship before you ask for money. Let's face it, no one is going to give a stranger money just because they ask for it.
  • Most investments come with some strings attached, including the need to relinquish some level of control. Be prepared for that and be prepared to negoiate in a business-like manner. (The ability to negoiate will also impress prospective funders. The abillity to be flexible indicates a partner with whom you can work.) Also, get independent legal advice to protect yourself before entering into any type of agreement.
  • The type of business also determines the type of funding you need. If you need funding for a small business, then friends and family and banks are the way to go. If you want to expand rapidly or launch a new marketing campaign, then other sources of funding may be needed and be more appropriate. If you are seeking investments with Angels or VCs, they are looking for returns of 5-10 times their investment usually within a 3-5 year period. Be realistic in your financial predictions before you approach them.
  • All businesses go through ups and downs. You need a cash flow strategy for dealing with economic downturns, seasonal variations in sales, lose of major clients, and other disruptions in your income and expense streams. The main rule of cash flow management is “Cash is King”. Any strategy for funding must consider this fact. (Cash Flow Management is a whole different subject area that really deserves a whole series of articles on it own.)
  • Venture Capitalists (VCs) only invest in large going concerns with annual incomes of $10 million and above. VCs do not have the resources to invest in lots of small concerns.
  • Before approaching Angels or VCs, check that they invest in your type of business at your business's stage in its life cycle. (See their web sites.) Also, find out who they have already invested in and try to interview these funding recipients. Doing this research first shows that you have done your homework. It also enables you to better understand them and hit their “hot buttons” when you finally approach them. Lastly, Angels and VCs usually invest in ventures that have been introduced to them by people they know and trust. (See second point above.)

Business Life Cycle

Businesses go through a life-cycle like everything else. These life-cycle stages often determine the type of funding you want or need. The stages we will consider here are:

  1. Conceptual – You just have an idea, but no concrete representation of the idea
  2. Prototype – You have a working prototype illustrating your concept. Something that others can see, touch, smell, try out. It is obvious then you are dealing with a product or consumeable. It is more difficult with a service. For a service, have testimonials from those you have performed similar services, or a web site, or known clients/customers needing your service.
  3. Launch – At this point you are ready to meet the market. This includes buying/renting/leasing equipment, premises, inventory, staffing, consultants, and marketing your services. Generally, this is a one-time cost, but a large one.
  4. Beginning to sell – You have launched and are now looking for clients/customers. This involves sales, distribution, marketing, more staffing, along with what you have already done.
  5. Expansion – If there is a demand for your products/services, you may decide to expand. This involves a large investment and is the best time to seek outside sources of funding.
Funding Risks and Benefits Table
Funding Source Stage Description Benefits Risks
* The Web has many resources for creating business and financial plans, as does EntreBahn. Besides offering How Tos, we also offer: templates, and confidential opinions, reviews and revision services.
** Crowd source funding for charitable work is fairly common and allows individuals to raise moderate amounts of money. Crowd sourcing for businesses is a relatively new concept. Getting the money is relatively easy, but paying back the investors is difficult because few mechanisms exist to allow the investors to be adequately compensated.
Friends and family 0-1 Those folks with whom you have a close personal relationship.
  • Easy access
  • Little “red tape” needed
  • Interest rates very low
  • Can destroy personal relationships
  • Usually limited to small funds
  • Little business advice available
Own savings 0-1 Use your own savings
  • Easy access
  • No "red tape"
  • Little or no interest due
  • No obligations to anyone
  • Limited funds available
  • Limits future personal investment choices
  • No independent business viewpoint
Credit cards 0-1 Buy/lease on personal credit cards
  • Immediate access to resources
  • Minimum "red tape"
  • Very high cost of money
  • Limited funds
  • Credit rating may be damaged for years
  • Can lead to personal bankrupcy
Continued employment 0-1 Develop business while employed at another job
  • Earning fund venture
  • Personal financial risk is very low
  • Limited time to spend on new venture
  • Legal complications with employer
Commercial loans 0-4 Borrow money from banks, credit unions, and financial institutions
  • Cost of money is relatively low
  • Some financial advice available
  • Helps establish credit
  • Failure causes personal assets to be seized
  • Financial plan needed*
  • Usual need financial history 3+ yrs
Government loans and grants 1,4 Many programs exist offering grants, loans, and rebates
  • Cost of money very low
  • Programs available from both provincial/state and federal governments
  • Difficult finding right programs for which you qualify
  • Qualifying "red tape"
  • Long approval lead time
Investment by Angel(s) 1-4 Investment on expection of partial ownership of successful business which they can sell
  • Medium funds available
  • Personal assets not at risk
  • Increased credibility
  • Good business advice available
  • Very difficult to get
  • Answerable to others
  • May give up significant ownership share
  • Business plan needed*
Investment by VCs 4 Investment on expection of IPO or sale to larger corporation
  • Large funds available
  • Personal assets not at risk
  • Increased credibility
  • Very difficult to get
  • Answerable to others
  • Need income >$10M
  • Expensive and time consuming to arrange
  • Business plan needed*
Customers / Clients 0-4 Investment by customers / clients who really need your service / goods
  • Larger funds available
  • Personal assets not at risk
  • Increased credibility
  • Understand customer needs first-hand
  • Single income source can bankrupt you if funding withdrawn
  • Narrowly defined results may not appeal to general market
Factoring 3-4 Business sells its accounts receivables (A/R) at discount Cash immediately available
  • Funds limited to <90% of A/R's value
  • Very costly funds
  • Need track record of sales
  • Damage to business credibility
Stocks/Bonds 4 Sell stock / bonds (IPO)
  • Massive investments possible
  • Increased credibility
  • Only for successful businesses
  • High cost to qualify to sell to public
Crowd sourcing for business funding** 0-3 Go to web to ask for funds, often from people you don't know
  • Moderate investments possible
  • Helps generates customers for your product/service
  • Can be low cost
  • Increases credibility
  • You need a compelling story, or pitch
  • Better suited to products than services
  • Requires good record keeping
  • Requires keeping investors informed
  • Small/new business have high failure rates. Usually caused by lack of adequate funds.
  • Fraudsters can pollute the investor pool from which you draw

 

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