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Start-up Funding Options

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Starting a new business venture will thrill you and challenge you. You’ll take on responsibilities you never knew existed but will become a regular part of life when you choose to launch your entity. It is likely that money will be a challenge, starting with figuring out how to finance the business launch and bring your entrepreneurial dream into reality. You’ll also need to secure sufficient funds to sustain operations while your marketing strategies kick in and attract customers whose purchases generate sales revenue.

The amount of start-up capital needed will depend on the product or service that your company sells and your sales and distribution strategy. Your start-up capital requirement could range from the low four figures to the high six figures and if your entrepreneurial plan is especially ambitious, the need might reach seven figures.

Unfortunately, nearly 40% of businesses fail because they run out of cash. Many aspiring business owners are under-capitalized from the beginning and are unable to hang on until the customer list grows and sales revenue builds. If the start-up capital requirement is modest, it’s likely that you’ll self-finance, but if your projected need climbs through five figures, you’ll most likely be compelled to look beyond your personal credit cards and bank balance.

It is essential that aspiring entrepreneurs accurately project the initial funding needs of their proposed venture and be proactive re: securing adequate working capital. Insufficient funding cripples your ability to invest in the infrastructure that grows the business—technology that supports business processes, from accounting software and marketing automation to the inbound marketing/ buyer’s journey experiences you’d like to present; appropriate staffing, full or part-time; an optimized company website; and your ability to attend networking events or invest in skills training.

When start-up costs can be expected to outstrip your personal resources, aspiring entrepreneurs must learn which doors to knock on when searching for vital business funding. Traditionally, most Freelancers and small business owners fund their start-up in three ways — personal funds, loans from friends or family, or a Small Business Association (bank) loan. While these are good options, larger funding needs are likely to require other sources.

The campaign to secure investment capital is time consuming; plan to devote three to six months for your financing crusade. If you plan to recruit investors, you’ll also need time to negotiate the terms as well as the amount of an investor contribution. Furthermore, there will be a legal process required to finalize investments made. Be aware that larger funding rounds often involve more extensive due diligence, negotiations and legal processes.

Since we’re talking money, maybe you’re looking for a good pitch competition? Click here to learn about 25 that will be held, or were recently held, on three continents in 2024: https://www.growthmentor.com/blog/startup-pitch-competitions/

Know your funding timeline

Begin your search for investment capital at least six months before funds run out, to give yourself time to replenish cash. If you are raising seed money for a venture that will need investment in the six figures, you’ll be wise to project the amount of funding needed to sustain business operations for two years. Projecting the number of months the venture can operate before running out of cash both documents the financial stability of the company and demonstrates that you are a responsible financial manager—qualities that are likely to inspire potential investors to fund your company.

Furthermore, giving yourself plenty of lead time as you search for investment capital can only strengthen your negotiating position with investors; it’s always best to ask for money while you still have money. Position yourself to have as much negotiating power as possible when discussing company valuation, terms of the investment loan and legal aspects of the funding deal. This can result in more favorable terms for you as well as minimizing worry about a cash shortage.

Investor database

An investor database will be a useful resource that allows you to streamline communication with potential investors and facilitate relationship-building by enabling you to manage the all-important networking process and follow-up with those who demonstrate an interest in learning more about your venture. Your database will consist of warm contacts; your strategy will be to commence networking and initiate conversations with a pitch that sparks interest and opens doors to follow-up meetings and serious discussions that might lead to successful investment deals.

Your investor database will also contribute to the success of your pitch, since you’ll have notes that document investors’ hot buttons and investment histories, so that you can customize your pitch with talking points that resonate. A personalized approach increases the likelihood of capturing investor interest and aligning your company with their investment priorities. Below are funding options that you may want to evaluate:

  • Venture Capital and Angel Investors

Venture capital (VC) is a form of private equity and a type of financing for start-up companies that have long-term growth potential. VC money generally comes from investors, investment banks and other financial institutions. VC firms raise money from limited partners to invest in promising start-ups or sometimes larger venture capital funds. VC investments in start-up companies might also be provided as technical or managerial expertise and the investment often includes strategic guidance and industry connections that substantially benefit the entrepreneur.

The downside is that landing a VC deal is extremely difficult; just 5 out of every 10,000 startups are able to secure VC funding. Entrepreneurs will need to prove themselves through rigorous due diligence and, if funding happens, living up to high growth expectations. Many VC investors are primarily looking to make a fast, high-return payoff and may pressure the company for a quick exit. Furthermore, VC investors are likely to demand a large share of company equity, make demands of the company’s management and founders risk losing control over the direction of the company.

VC isn’t the right funding choice for all start-ups. If it seems a fit for your venture, look for VC firms with expertise in your market plus target a funding amount that aligns with your needs. To obtain more information about VC investors click here https://www.vcaonline.com/directory/invdir/

By contrast, the typical angel investor is a high net worth individual and might include certain family members, close friends, or other associates who know you and might be interested in supporting your business venture.  They may have acquired their wealth through a variety of sources; however, most are themselves entrepreneurs or retired executives from enterprise business companies. These investors are inclined to fund ventures that are involved in the same or similar industries or business sectors with which they are familiar.

Unlike a bank, which will demand concrete proof of the viability of your proposed business venture, an angel investor might be more willing to gamble on your great idea. Angel investors generally understand the risk of investing in start-ups and may not expect any return on capital if the business fails. No wonder they’re known as angel investors!

To find potential angel investors or venture capital sources, networking within your business community is a must. Make a point to attend local business, trade and community organization meetings and other events to meet people—have your pitch well-honed. Start your research on angel investors by visiting sites that match entrepreneurs with angel investors:

Angel Capital Association : A collective of accredited angel investors

Golden Seeds : A group whose members focus on women-led ventures

Angel Investment Network : A network that seeks to connect entrepreneurs with business angels

  • Revenue Based Fundraising

The downside to raising capital through traditional debt financing is that it requires the business to accrue debt with interest. Revenue-based financing (RBF) https://www.joinarc.com/guides/revenue-based-financing is a type of business funding in which a company receives investment capital by promising a percentage or certain amount of the venture’s future projected revenue stream to investors. This is potentially a win-win for both aspiring entrepreneur and investors, as the start-up entity receives the necessary capital to launch and build the business by generating sales revenue, and the financer generates a return. 

  • Crowdfunding

Crowdfunding is a method of funding a business or venture by receiving small amounts of money from a large number of people who believe in the project. While crowdfunding can be an effective way to raise capital, it will require the business to convey its brand through compelling storytelling, strategic marketing and aggressive promotion.

In addition to financial resources, crowdfunding can also help the business build an excited and loyal community around the company’s products and services. It can also simultaneously validate if there is demand in the market for your business early in the startup process.

Crowdfunding bears similarities to angel investing. While traditional angel groups seek to match entrepreneurs with accredited investors, crowdfunding sites allow lots of smaller investors to pitch in to move your venture along. You’ll likely have to apply to have your idea or business vetted by the site before they’ll present your project to their members. Sites that are worth a visit include:

SeedInvest https://moneywise.com/investing/alternative-investments/seedinvest-review

WeFunder https://www.nerdwallet.com/reviews/investing/brokers/wefunder

Fundable https://www.trustpilot.com/review/fundible.com

  • Blockchain-based financing

Blockchain technology may provide exciting new options for start-up fundraising, with the use of digital tokens and decentralized finance (DeFi). These innovative fundraising approaches enable start-ups to access capital in a transparent manner that operates outside the traditional banking sector. Blockchain technology can be used to issue and manage digital tokens that represent equity or debt in a venture. These tokens can be traded on secondary markets, providing liquidity to early investors. blockchain also allows startups to raise funds through initial coin offerings (ICOs).


DeFi is built on blockchain technology, primarily leveraging Ethereum.  Unlike centralized financial institutions, which rely on intermediaries such as banks, DeFi operates on blockchain networks, enabling peer-to-peer transactions, lending, borrowing and other financial activities without using intermediaries. Smart contracts, self-executing code on the blockchain, form the backbone of DeFi applications. These contracts automate financial processes, eliminating the need for intermediaries. Still, DeFi is still evolving, and there are smart contract vulnerabilities and regulatory uncertainty. Users must conduct due diligence, diversify and understand the risks before participating in DeFi.

Another way to fund a blockchain startup is through initial coin offerings (ICOs). ICOs are a type of crowdfunding, where a company raises funds by selling digital tokens to investors. ICOs can be used to fund the development of a new product or service, or to support the growth of a company.

  • Government grants and incentives

To help encourage business growth in their area, many state, local and federal agencies offer grants, incentives, or tax breaks to businesses that satisfy certain criteria such as operating in a specific industry, for example, STEM (Science, Technology, Engineering, Math). Securing government funding can be time-consuming and come with strings attached, so entrepreneurs should carefully consider their options before applying for government funding. https://www.shopify.com/blog/small-business-grants

Thanks for reading,

Kim

Image: © Snaprender

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Business Failure: Autopsy and Recovery

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Failure and setbacks in a business venture can take many forms, from a botched new product or service launch, to cash-flow insufficiency, losing the lease on the perfect storefront or office location, to the appearance of an aggressive new competitor. Business failure is painful and humiliating.

Even if the pre-launch planning and start-up capital are inadequate, significant research and planning and usually a large sum of money (that may have been borrowed) are nevertheless invested with the hopeful intention of bringing a new product, service, or company to life. If things don’t pan out, it’s inevitable that those involved feel crushed and demoralized.

The intricacies of launching and operating a business can cause any venture to falter, even if the founder is not directly responsible for the downfall. The many moving parts of a new venture can cause the founder to overlook essential factors, resulting in a failed launch.

Yet, in some cases,  it’s possible to recover and relaunch after an autopsy has been performed and you and your team (if there is one!) have figured out why things unraveled and how to avoid that problem and maybe others, too, in a second attempt. Common stumbling blocks include insufficient operating capital, an ill- conceived business model, an inadequate assessment of what target customers value and improper pricing.

Many Freelancers and entrepreneurs, after allowing themselves to grieve the loss, are able to move forward with determination and a better plan (and additional resources, most likely) to do much better in the next iteration. Take a look at these common causes of business failure and make note of the lessons to learn:

Unanticipated start-up costs and low sales revenue

Whether you self-financed and bootstrapped your business or borrowed from a bank or investors, you can find yourself in financial quicksand if your projections of start-up costs were underestimated and expectations for customer acquisition were blue-sky optimistic. It’s very easy to rack up big credit card debt and then succumb to panic that leads to making reckless decisions, such as second- mortgaging your home or borrowing from friends and family, as you struggle to successfully launch and create adequate business revenue. Unfortunately, you might find yourself unable to repay as expenses mount and customers are slow to arrive.

THE LESSON IS, do your homework. Thoroughly research the amount of money that will be required to launch your new business, or new product/ service, and make a rational plan for how to acquire the funds, whether you go to the bank, self-finance, ask to borrow from selected family and friends, or take on partners.

Regarding target customers, your first task is to figure out who will buy what you propose to sell, whether products or services. Is there a viable and growing market? Moreover, can you access those prospective customers, something that can be a challenge in the B2B sector.  Realistic financial projections will protect you, especially a Break-Even Analysis, which helps you predict when customer sales can be expected to pull into profit-making territory.

Finally, develop a profit-making business model. You must anticipate the start-up costs, be able to access the targeted customers, you must have the right method of delivering the products or services and pricing must be acceptable to the customers and profitable for the company.

Receivables collection problem

“They’d take sometimes 3 – 4 months to pay and it was killing my cash flow,” she said. “I couldn’t pay my suppliers without difficulty. (The company) refused to pay with a credit card. I was trying to get paid.” Lara O’Connor Hodgson, Co-Founder of the NOWaccount

As counter-intuitive as it seems, a business owner can have orders flying out the door and be totally broke. The problem, as described above by Lara O’Connor Hodgson, is that customers can be slow pay and the difficulty in collecting accounts receivable has put many businesses under.

THE LESSON IS, healthy cash-flow is essential to sustaining a viable business. Investigate the NOWaccount, which guarantees that invoices will be paid on time and in full (both you and the customer must have good credit). Those in a service business (me!) are advised to ask clients who contract to pay a project fee for an assignment to pay 15 % – 20 % of the total fee at the contract signing and link additional payments to project milestones or specific dates (at 30 day intervals, for example). The final payment owed should be no more than 25 % – 35 % of the total fee. In this way, you will receive regular infusions of cash and be much less vulnerable to a payment default by ghosting.

Powerful competitor

Facing a big new competitor is scary, but take a couple of deep breaths and take heart. If you’ve been in business for at least a year and managed to attract customers and deliver your products and services adequately, then you have a chance to hang on and continue with a growth trajectory. Just don’t panic; shift your adrenaline to market analysis instead. In reality, your competitor probably does not offer better quality products or services but rather has resources (like a generous advertising budget) that your organization lacks.

THE LESSON IS to 1.) analyze your competitor’s operation and determine the obstacles you need to overcome or what you need to do differently, i.e. smarter; 2.) refresh your customer knowledge to learn how their expectations and concerns may have changed to make them susceptible to switching their business to the competition; and 3.) avoid competing on price, which is usually an unwise strategy for smaller operations.

Larger companies have more money to work with and that allows them to hire more employees, offer a wider range of products and services, roll-out splashy marketing campaigns, stock more inventory and more flavors or colors and also offer lower prices because they can afford to buy in volume from the wholesalers.

Your defense is to brand your business well and customers reasons to think twice about opting for the competitor. Because no two businesses are alike, you must define for current and prospective customers why they’ll do better by doing business with you.

The heart of branding is defining and constantly communicating a company’s unique selling points, so you must 1.) understand the competition’s unique selling points and 2.) learn to clearly define and articulate your organization’s unique selling points so that you can build on the attributes that set your company apart and potentially make you valuable to customers.

When you understand your competition’s unique selling points and update your customer knowledge to learn as many specifics as possible about what resonates with them, at least theoretically, about the competitor’s unique selling points, you’ll see how to tweak your offerings in ways that reflect your company’s “house style.”

New and small businesses should definitely put an emphasis on excellent customer service. The digital revolution has not meant that customer interactions aren’t essential, even though face-to-face communication has become more limited for many.  To the contrary, customer service is even more vital in today’s business world.  Present a customer first attitude and create a pleasing customer experience. Go the extra mile to surprise and delight and your business will quickly become trusted and loved.

If you have employees, you also want to ensure you are the best employer in the industry. Having motivated and skilled staff will provide benefits for your customers and that will translate into benefits for your ability to successfully compete.

Some of the most successful entrepreneurs have suffered the frustrating experience of a business failure. For Scott Adams, creator of the world-famous Dilbert cartoons, life’s path wound through many jobs, failed startups, useless patents he applied for and countless other indignities. In his memoir, Adams shares lessons learned about keeping himself motivated, healthy and happy while racking up the failures that ultimately led to his success.

“It’s fine to celebrate success, but it is more important to heed the lessons of failure.”  Bill Gates, Co-Founder and former Chairman and CEO of Microsoft Corporation

Thanks for reading,

Kim

Image: American Gothic (1930) by Grant Wood (1891 – 1942 Anamosa, Iowa, USA) courtesy of the Art Institute of Chicago. The painting depicts an Iowa farmer and his daughter.