You have the big idea, but now you need the money to build it which means you have to know how to raise capital. This is the next big hurdle to get past in order to bring your company to fruition. Raising money to launch your small business is a full-time job and usually takes much longer than you think it will. Even after you have successfully obtained funding, you will still need to allot some time each month to raising more money because many businesses need more than one round of capital to keep the doors open.
Fundraising usually starts with you–your savings, credit cards and second mortgages (not all of which are recommended). From here the typical entrepreneur turns to family and friends, with whom you should be clear whether the money is considered a loan or a small equity position. High net worth investors like angels and venture capitalists, who invest for what is usually a large equity stake, are the next potential source of capital. You may also consider a bank loan, but this tends to be more suitable for existing businesses that are looking to expand. Crowdfunding is the latest source of funding for new businesses and offers very exciting possibilities.
As mentioned in the opening video, angels can be a helpful source of investment in the $50-250K investment level. AngelList is a one-stop shopping platform that instantly exposes your business opportunity to thousands of angel investors. Another option, Gust, is a platform designed to connect investors to entrepreneurs. The Angel Capital Association offers an Angel List organized by geographic region as angels often like to invest in companies located in their geographical area.
Crowdfunding and Alternative Investments
Crowdfunding is an exciting new option for entrepreneurs examining how to raise capital. CareerFuel’s CEO has been a leader in the crowdfunding space and we have a comprehensive section dedicated to this which is found here.
Another means of accessing personal capital to launch a small business involves converting some of your retirement assets into Rollover for Business Funding (ROBS). It allows you to use your retirement savings, tax deferred and penalty free, to fund a startup. This funding mechanism can include a rollover 401(K), IRA, or SEP (if the SEP is open for more than 2 years) or any combination of the 3 acceptable types. ROBS works by creating a corporation with its own retirement plan. The 401(K), IRA or SEP funds are rolled into the new entity’s retirement program. Stock is purchased in the new company using these funds. Capital is now available to buy a business, start a business, use as collateral for an SBA loan, etc. Basically, you are up and running and have cash flow to manage your business. This is one of the companies that offers this service.
Most small businesses never need money from professional investors like angels and venture capitalists. Some, however, require millions of dollars to create and/or scale. Venture capital (VC) is the most likely investment for this type of company. Right now, VCs expect most startups to have at least a prototype and market success before they will consider investing. The road to meeting with venture capitalists is through networking. They are most receptive when you have been introduced to them by someone they trust. This process is a long, delicate, and frustrating one, requiring a lot of homework and ideally a mentor. Steve Blank, a successful entrepreneur turned professor at Stanford and UC Berkeley, has created a fantastic list of all the best articles, blogs (our personal favorites include Both Sides of the Table, Fred Wilson—A VC, and Startup Lessons Learned), pitch suggestions, term sheet and valuation guidance, legal issues, etc. Scroll to the end for the good stuff. If finance is not your thing and you need to raise money from angels or VCs, this short video series about venture capital from Khan academy will help give you the confidence to meet with investors.
The SBA (Small Business Administration) may be familiar to you as a source of government loans to small businesses. While this is part of the SBA’s job, it doesn’t typically offer such services to startups. SBA loans are administered by banks as part of the commercial loan process. Take a quick look to see if you may qualify.
Right now small grant money ($1K) is available with this foundation and there are no strings. For non-profit entities, Grants.gov is a clearing for information on over 1,000 grant programs. Also, BizPlanCompetitions.com has a fantastic list (albeit not complete) of entrepreneurial contests and business plan competitions. Many lean startups obtain their seed funding by competing and winning business plan contests.
For people whose investment needs are relatively small, microfinancing might be a good fit. This is particularly suitable for the person who needs to buy a sewing machine to run a tailoring business or operate a food truck. Accíon, Grameen, Seedco and Kiva are several of the largest companies that offer microfinancing loans. Grameen, started by an economist who went on to win the Nobel Peace Prize for his programs, helps companies in the Northeast and South and does not maintain a minimum credit threshold, arguing that credit history isn’t predictive of small business success.
Sometimes the best investor is what is called a strategic partner. This could be a vendor or compatible business that has a vested interest in your company’s success. One example is a new television advertising technology cooperatively backed by Comcast, owner of NBC and several cable networks. Such partnerships require a lot of thought but may prove very effective. If you are a web or mobile company and need technical expertise, there are new companies that provide labor in exchange for equity. This can be a great way to fill out your team if it lacks programming/technical talent.
As fundraising has moved online and the data has become more transparent, the question “how to raise capital” has never been easier to solve.