Is Your Business Ready
for Outside Funding
Is your business likely to make enough
money to reward your investors? Can you prove it?
Where You Start
Complete a business plan! You need
to do your market research, forecasting, and determine your likely
cash flow. That’s the only way to determine how much money
you need. DON’T make a flying guess at what you THINK you need.
It has to be documented, and it has to be enough. Asking for too
little can be detrimental to your chances of getting funded and
to the success of your business. The number one reason why
businesses fail is lack of cash.
Where do you think you’re
going to get your money?
Who gives you the money is going
to be dependent on a number of factors. How much money do you need?
Why do you need it? How much money are you going to make with it?
Where do people usually get their
money? We start with a large variety of sources.
- Yourself. What do you have
in your personal savings? How much credit do you have available?
A LOT of businesses have gotten their starts on somebody’s
VISA card.
- The Three F’s: Family,
Friends, and Fools! These are the people that will give you
money because they love or respect you. Or, because you know where
they really were last Saturday night when their wife/husband thought
they were with you!
- Grants. Everybody is always
looking for a grant, which is a direct sum of money that you don’t
have to pay back. However, most grants are for very specific purposes
such as producing a work of art or developing a new technology
that the government can use. Outside of these categories most
grants that you usually hear about are given to non-profit organizations
rather than individuals. Grants normally require a great deal
of documentation to prove that the funds were used as intended.
- Loans. If you’ve got
great credit and good collateral you may qualify directly for
a loan. Banks and investment companies want to minimize the risk
that they’ll lose money if your business doesn’t succeed.
They may turn you down and tell you to reapply for a government
guaranteed loan that will protect 85% of their investment. That
doesn’t mean that you’re off the hook if your business
fails. Typically, you also have to guarantee the loan personally.
The banks and investment companies will charge you interest and
fees based on how risky your business appears to be.
- Angels. Angel Investors
are successful private individuals who are looking for a good
return and for an interesting investment. Angel Investors traditionally
have made 2 - 3 times the money that they could get in a “safe”
investment. If you are looking to double the value of an investment
in your business in three years, Venture Capitalists won’t
be interested, but Angel Investors might be. Angels want to make
more than they could with a “safe” investment, but they
still want a good chance of at least getting their basic investment
back.
- Venture Capitalists (or VC’s).
Venture Capitalists are looking for a “home run” that
will give them at least ten times their investment in 3 - 5 years.
Although they are usually looking to hit that home run, they’ll
cut their losses. They are usually investing their money and that
of other individuals, funds and corporations. VC's typically want
to exceed portfolio investment expectations. On average they expect
that one will make that “home run,” 2 - 3 will make
a moderate profit or break even, 5 - 6 will lose money but will
have some value if they’re liquidated or sold, and 1 - 2
that will likely be a total loss. VC's are not in the business
of losing money, though, so they can be quick to make changes
if the company is not making its targets.
Proof
Banks, friends, family and others
that really are depending on that money want it back!
A business that has already been
making money and now needs capital for a business purpose, such
as expansion, is the best investment for a conventional investor.
Their revenue is documented and the management team is in place.
Angel Investors and VCs want to make
a lot of money! The safest investments usually do not offer them
that upside potential. They are looking for a large, well-defined
market opportunity. They want a really good management team that
can drive the company to reach or exceed the goals set in the business
plan. They want a product or service that customers will buy. The
best proof for them is good, solid market research and proof that
the concept will really work. And the “gold standard”
is a proven management team that has been successful in the past
and made a LOT of money for the investors.
Caution: Sometimes it’s easier
to go to investors who specialize in high risk/high return investments.
Mom and Dad/Grandpa and Grandma may have the money that you need,
but you may end up paying a lot more in emotional turmoil if you
lose it for them than if you lose it for a professional VC.
-Kris Bell and Cindy
Nemeth-Johannes
