Self-Fund Your Firm
The internet has leveled the playing field for cash-strapped entrepreneurs and innovators. Today it is possible to set up a fully-fledged firm and access a market of more than three and a half billion people via the world wide web. A tight budget could be considered a disadvantage. But there are actually numerous benefits to boot-strapping a business, as self-funding is known.
For one, it fosters a culture of self-sufficiency that will serve small businesses well when cash flow is dredging. An abundance of capital can also encourage frivolous spending. Conversely, when money is in short supply, you are forced to cut costs and create efficiencies — improving your margins.
And outside investors often demand that you relinquish control over your company. Appeasing investors can be a major source of distraction. With your own funds, you’re free to focus on what matters most — growing your fledgling venture.
Try speaking with friends and family about your business idea, as they may want to help you out financially. Consider tapping into your savings or retirement pot. But weigh the risks carefully. The majority of businesses fail, and many successful entrepreneurs do not strike gold until they have flopped a few times first.
Tap a Venture Capitalist
Venture capital is usually reserved for later-stage companies which need significant funding to accelerate their growth. A VC will usually take an equity stake in your company and take an active role in its operation — meaning you lose some control.
But the advantages often outweigh the downsides. Aside from significant cash reserves, VCs usually have significant experience as an entrepreneur and then investor; they act as advisors and mentors, helping your business grow.
After you submit your business plan to a VC, they will conduct extensive due diligence: examine the fine detail of your company and create a contract to set out the conditions and milestones they expect to be reached in return for their financial firepower.
But beware: choosing the right VC is vital to a successful partnership.
They must be aligned with your ambition for the company, otherwise divisions may slow the progress of your business.
It’s best to research the VC thoroughly before submitting your business plan to their firm. Also, it’s often a good idea to pick an investor who specializes in your industry, be it ecommerce, social media or another segment of the tech industry. Pick a firm that you can work closely with and take advice from.
Crowdfunding sites are an excellent way to raise funds without giving up too much control over your company. Some crowdfunding platforms require that investors take equity or acquire debt, others let retail investors provide small amounts of funding in return for services or products.
But it is not as simple as placing a pitch online and waiting for the money to flood into your bank account. There are a few essential steps you must take to ensure a successful crowdfunding campaign.
The first is to secure an “anchor investor”, someone who invests before your crowdfunding campaign goes live. When you have people backing you from the get-go, your pitch is perceived as more valuable. And there’s a lower perceived risk, which can help you secure further funding.
Another tip is to engage with your crowd, even the people who have already invested in your campaign. For instance, you could count down to significant events in the campaign, hold product giveaways or contests.
Also, use social media, thank-you emails and frequent updates to stay connected with the community you’ve created. This will build anticipation and increase investor engagement with your campaign — and may help you tap into your investor base for customer referrals and for future fundraising campaigns.
Try a Bank Loan
To keep control over your firm, a bank loan is an option. But you’ll have to jump through several hurdles to get one. First, consider your cash flow. Most banks are more comfortable lending to businesses that are cash flow positive and are profitable — and consistent. Brilliant, visionary ideas won’t get you very far at JPMorgan Chase or Goldman Sachs. You need hard facts, spreadsheets and tax returns.
A good strategy is to view your credit report before you apply for a loan. If it’s low – don’t bother. Work on building a sound credit score before asking for a loan from a bank, as this is one of the first things they will look at when screening your application.
You may also need collateral, or a secondary source of repayment, such as real estate. This provides the bank with a guarantee that they can reclaim their money should you run into financial trouble. An advisory centre could help you understand all of this, and put in place a plan for securing bank capital. There are lots of free resources in the US, such as business development centres where executives offer to counsel and mentor startups for free.