Thoughts for small businesses and startups on raising capital Mike | October 6th, 2009

So you have a great idea, right? You’ve written a fantastic business plan, researched the market extensively, have a deep understanding of the competitive landscape, and have a watertight financial model that shows how you can reach profitability even in the worst-case scenario. Now it’s time to get out there and find your funding. Easy, right? Not so fast there, bucko! The Small Business Administration published a study almost ten years ago which showed that for the year 1995 300,000 small businesses sought over $30 billion in capital, and (guess what?) went unfunded. The competition for scarce investment dollars is as fierce today as it was then. Fiercer, given today’s economic outlook and the great credit crunch of ’08-’09. Here’s a few basic thoughts:

WHO YOU GONNA CALL? First take a hard look at the sources of capital that are available to you. Your decision on whom to turn to should be driven in part by your funding needs, but also by the level of comfort you have in a given source’s ability to meet those needs. Your great-Aunt Sophie may be willing to help you out with a couple thousand bucks, but when your raise is $5 million, Aunt Sophie may not be of much help. Entrepreneurs have tapped into their own bank accounts, their credit cards, VC firms, Angel Investors, bank loans, and trade credit to get their businesses launched and keep them running. Funding sources fall into two broad categories (photo credit: LShave):

  • Debt financing. This includes the gamut from personal loans to credit cards to bank loans. Debt financing is certainly less expensive than equity, but carries with that additional personal risk. Not to mention the fact that the credit markets are just beginning to thaw after a year of Arctic-like inactivity. Banks are also very hesitant to lend to a new company with no assets, revenues, or receivables,
  • Equity financing. The spectrum here is represented on one end by your own savings and on the other by VC or other institutional funding. Friends and family are a great source of equity investment if your needs are modest (and you are comfortable that the risk is manageable). Angel investors are also a good route to explore; according to the SBA, over 50,000 companies are funded by angels every year with over $23 billion invested!

FIND INVESTORS WHO HAVE SOMETHING TO TEACH YOU. Remember that there are lots of smart people out there from whose experience you can benefit. Leverage that knowledge to adjust your pitch, iterate your idea, and emerge stronger. Being humble is a strength, not a weakness and you have embarked on a very steep learning curve. If you are fortunate you will find investors to help you move up that curve. This applies no matter where you go for funding – VC’s, Angels, Private Equity, and Banks are all great sources of knowledge, experience, and feedback and you should take full advantage of this invaluable resource. (photo credit: no-name-face)

DO NOT BACK DOWN. You’re going to meet lots of potential investors with lots of tough questions and a deep, deep well-spring of skepticism. Answer their questions, defend your assumptions, showcase your research. Then move on to the next pitch. Don’t let the inevitable “no” deter you from your task, which is to raise funds for your dream. Entrepreneurs are a tough breed and the process of getting to Yes will toughen you further.

YOU ARE THE INVESTMENT. Remember that until that first dollar of revenue is earned, what you are asking people to invest in is not so much the “idea” as it it is you. There are tons of great ideas out there, but investors will be looking as much at you, your experience, your abilities, and your judgment as they are your idea.. If they do not have confidence in your ability to execute your plan, they will not take the risk. Period. So be prepared for the  inescapable questions about why they should invest in you as much as you are ready to tell them why they should invest in your new business. (photo credit: Living in Monrovia)

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