Raising Capital for a Startup: 5 Tips
There was a time when anything that ended in “dot-com” would pique the interest of venture capitalists and private investors — even family members and friends. Massive amounts of money changed hands in those days. Many startups burned through cash as quickly as they got it and produced nothing of lasting value. Others built the beginnings of the successful web-based commercial landscape that we see today.
Most businesspeople learned from that. Money is still moving from the accounts of investors into the hands of eager entrepreneurs, but in a smarter, more cautious fashion. Business plans are scrutinized, as are the individuals behind them. Would-be business owners must prove that there’s a market and an audience and pretty darn good chance of success before they get funding.
Whether the products or services you want to sell are tech-related or not, you may still have to deal with the aftermath of the tech bubble and its subsequent bursting. If traditional funding avenues aren’t available to you for that reason or any other, there are creative alternatives that have popped up in the years since.
One task you’ll have to undertake fairly early on is to create optimistic but realistic financial projections. You can use the models included with your business plan template (one of the best for small businesses is cloud-based LivePlan). Depending on which solution you use, a cloud-based accounting application may be of help here in terms of organizing data and creating budgets.
Certainly, you should consult with your financial advisor. It’s one thing to plug numbers into a spreadsheet, but quite another to understand why a particular table is important, and what it will say to potential backers. He or she can also assist as you build projections.
Investors will certainly want to see these numbers. But you may encounter some who don’t put a lot of stock in projections from startups because they haven’t panned out in the past. So be sure that you also have:
- A compelling story,
- A simple problem/solution/benefits narrative,
- A clear, concrete understanding of your market and your potential customers, and,
- Absolute confidence in your mission and your goals.
Understand the differences between funding sources. Do you know the differences between an angel investor and a venture capitalist? Before you even think about approaching one of them, know what other types of startups they’ve supported, how much control they’re going to want, what kind of time and money it will take to pin down an investment, etc. They’re going to learn a lot about you, so educate yourself fully on who they are.
The Small Business Administration (SBA) has a good deal of information about traditional investors as well as government grants and loans, should you decide to pursue those options.
Use rejection to your advantage. Work on your pitch. Tighten up your business plan. Are you overwhelming your potential investors with too much information? Too little? The wrong kind? Learn from every “No.” If lenders don’t explain why you were turned down, ask if they’d be willing to give you feedback.
Thank everyone who’s considered you after the fact. You never know who you’ll cross paths with again, and you want to leave a positive impression.
And keep your chin up. Securing financing for a startup is rarely easy.
Consider your crowdfunding options. You’ve heard their names. Kickstarter (for creative ventures). Indiegogo. RocketHub. Onevest. Instead of getting a substantial sum of money from one source, crowdfunding helps you launch your business with the help of numerous smaller investors.
There are alternatives to banks. One area where it’s easier than ever for small service businesses to raise money is from alternative lenders such as our newest partner, Funding Circle. These types of companies lend to businesses to whom banks are usual reticent to lend because because they are small and lack any significant assets.
Use your time wisely. Prioritize your search. Spend time and energy exploring realistic possibilities. Don’t wear yourself out chasing an unlikely investment firm, big as their bankroll may be.
The romantic notion of entrepreneurs who live on caffeine, little sleep, and unrealistic expectations as they chase the big one is just that: a romantic notion. It’s worked for some individuals. But it’s like the cartoon that pictures two spiders who have spun a human-sized web. We only have to catch one, they say to each other.
Meantime, smaller – catchable — prey abounds elsewhere. Explore all of your options before you pounce.