Sources of Funding – Part 1

08 Mar

Sources of Funding – Part 1

You have a viable product idea and successfully developed your business plan; now it is time to find financing to bring your product into existence and to market. Congratulations on your achievement so far, now the bad news: every entrepreneur needs money and getting it is quite a challenge especially if you are unknown in the entrepreneurial environment and have not proven yourself in the past in other entrepreneurial ventures.

You will need cash for acquiring assets, working capital, and to fuel growth. I told the Startup Quest program 2 team members I mentored in recently, that the business plan and investor presentation exercise is successful when you are able to convince a total stranger to give you their money for you to “play” with in the hopes of future rewards. Most investors will not touch you unless you have some skin in the game. So the challenge becomes how do you survive the “valley of death” to that first sale and subsequent growth. The key is to talk with as many potential investors as possible to increase your chances of securing finances.

Your funding will be broken down into two main categories: debt and equity. With debt, your investor gives you a loan and in return you provide him periodic payments of principal and interest over a predetermined period. With equity, your investor will want a share of your business for the money he puts in. How large the share will depend on how hot your idea is and your negotiation skills. Be wary of not giving up too much too early.

Initial equity capital will come from your personal savings, credit card, 401K, employee payout, and many hours of unpaid work. Once you have exhausted your personal funds, family, and friends are the next persons you will turn to for money. During this phase you will be bootstrapping as long as possible. After your family and friends no longer return your phone calls, it is time to look for angel investors. Angels are private individuals or group of individuals with extra cash looking for an opportunity to beat the market return by investing in startup companies.

Tune in next time for the conclusion of this two-part source of financing series.