By Andy Stewart
Me: So how much capital are you trying to raise?
Founder: Well, I would really like $5 million, but I can get it started with $500,000.
Me: Okay and how much of that are you bringing to the table, or have you personally invested already?
Founder: Um, well, none of it. If I had money I wouldn't need money. (This is a very common response, by the way.)
Me: Do you have a plan to raise the first $50,000?
Founder: Um, no. I need at least half a million.
Me: That's not going to happen at this stage, period. You need to focus on raising the first $50K. I can show you how to do this if you’re interested in learning.
At that point the founder is either paying close attention or looking for someone else who is willing to listen to them.
My point is, there seems to be a lot of confusion and misconceptions when it comes to funding a startup business. Whether you are opening a shoe boutique, building a theme park, or developing the next great social network, the principles & realities of what WILL and WILL NOT work are fundamentally the same when it comes to getting access to capital at this early stage.
Before we get too far ahead of ourselves, let's discuss whether or not you should even start this business.
First you need to be realistic about what you're trying to accomplish. Just because you love it doesn't mean you have a sustainable business or a product or service which people (lots and lots of people) will actually PAY for.
So, thoroughly & honestly evaluating your idea is critical. I have shared a very wise article on this subject which I suggest you read. It was written by someone who has started more companies than you and I likely ever will.
Once you've decided to move forward with your idea, the next question 99% of us have to face is "How do I fund this?" Unless you have a rich uncle or friend, you will do it the same way most of us do: With a day job, hard work, resourcefulness and cleverness. You might be able to raise some money through friends and family, but if you aren't putting your own cash in, don't assume anyone else will.
Too often I see founders looking for 100% funding from outside sources. They expect someone else to foot the bill to cover their startup expenses, and when they learn that this scenario will never happen, they often become discouraged, and sometimes even angry.
The simplest way I can put it is this: If you aren't willing or able to put your own money and resources on the line, why in the world do you think someone else would? Turn the tables for a moment. Would YOU be willing to hand over your hard earned money to someone who is unwilling or unable to put their own share in? Of course you wouldn’t.
Getting through the seed stage is where most startups fail, which is another reason why attracting outside money at this early stage is so difficult. Why should a bank or an investor accept 100% of the risk? It’s simple; they won’t.
Assuming you don't have lots of money in the bank or stellar personal credit, and you can't or don't want to take out a 2nd or 3rd mortgage on your home, let's look at some real solutions to funding your startup. There aren't many, so my suggestion is to leverage as many as you can.
Once you have registered your business with the IRS and Secretary of State, you can begin establishing credit in the company's name. Many business owners miss the boat on this one. There is a very specific process which needs to be followed in order to keep your business credit separate from your personal credit. Keeping your business & personal credit separate will ensure that one does not negatively impact the other at any point in time.
Having strong business credit will open doors to financing which will benefit your business for years to come. Now I'm NOT suggesting you run out and rack up a mountain of debt. Use the credit extended to you wisely. Doing so will build your company's credit to a level which will help in obtaining micro enterprise loans or revolving lines of credit.
Building business credit is the most sure-fire way I am aware of for startups to get access to financing & outside capital early on. If you follow the right path, it will work 100% of the time no matter who you are or what your background is. You won’t get access to millions of dollars this way, but you can certainly get enough to move your business forward, and you will have financing available to you when you need it most.
But perhaps the best way to fund your startup is to SELL SELL SELL. Your product or service can be your very own printing press. You just need to learn how to work it. Granted, this does not work for every type of business, but provided you have a product or service which people WILL BUY, you are halfway there.
Working with a company who provides AR and PO financing is the other half of the equation. AR financing is a great way to improve your cash flow, and with a growing number of finance companies offering this service, it's becoming easier to get access to it.
Do some research on AR financing (also known as factoring) as well as PO financing. It is a relatively low-cost type of financing and I have watched a number of companies use it to accelerate their growth and ultimately flourish.
Another option which many founders exhaust too early in the game is the 3 F's - friends, family & fools. We've already touched on this one, but my suggestion is to hold off on hitting up your family and friends unless you absolutely need to. Not only does this make people uncomfortable, but if things don't go as well as planned, it can cause major problems & distress for both you and them.
Depending on the type of business you are running, and what your background is, you may be able to qualify for grants or low-interest loans. Check with your local SBA, government websites, universities, and economic development centers (EDCs), etc. to see what might be available to you.
If you are utilizing everything mentioned above, and working a job or two, your chances of getting through the seed stage successfully will be increased exponentially. Once you have gained momentum, or traction, you can start looking for some outside money. Network through some investor or startup groups. Who knows, you might even be able to get an angel investor on board.
Once you've made it through the seed stage and your business is flourishing, you can start looking for serious investors. If you aren't making headway with this on your own, I strongly recommend that you speak with investment firms and advisors who speciallize in preparing companies for investment. Not only will you significantly increase your chances of a successful raise, you will be able to focus on your business while seasoned investment professionals focus on raising the capital you need to grow.
Remember, being a successful entrepreneur demands that you effectively leverage your time & resources. Stay focused on growing your business by hiring professionals who can get you the results you need.
For more information on this, or related subjects, email: firstname.lastname@example.org
Reproduced from: Idea Crossing