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:

0. Conceptual – You just have an idea, but no concrete representation of the idea
1. 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.
2. 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.
3. 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.
4. 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.