There’s no doubt about it, starting a business is no easy task. One of the first hurdles that you have to overcome is obtaining the necessary capital to get your company to the cash-flowing stage.
Why are many lenders and investors so difficult to convince when it comes to obtaining loans or capital from them? There are two answers to this question.
Failure and Finances
The first answer is that the failure rate of startups is quite high. In fact, I just read a study in which the authors report that 70 percent of today’s startups won’t be around in three years — not very encouraging!
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The second answer is that so many businesspeople do not prepare an adequate, professional business plan that convinces investors that the principals of the new business know what they’re doing and are not just incurable optimists.
There’s not much that you can do about the first problem — the high failure rate of startups. This is a fact of business life. So, in a sense, you’re starting your journey with at least one strike against you. Fully accepting the fact that so many startups fail gives you reason to prepare a business plan that is anchored in reality, and that contains projections that are obtainable.
If you review my E-Commerce Times article entitled “A Great Business Plan: The Key to Raising Capital,” you’ll find many helpful hints on how to draw up a convincing business plan. You’ll also find a sufficient amount of detail as to the absolute basics that your business plan must contain.
Once you have a realistic and conservative business plan, you are ready to go after the different sources of capital. There are a few options.
I am sorry to say that in many cases your local bank is not the greatest place to go for a business loan. Bankers prefer to make asset-backed loans and, in so many cases, the startup doesn’t have many assets to offer the bank.
For this reason, your local banker might suggest a Small Business Administration (SBA) loan. This type of loan has helped many small companies get started. In fact, the first business that I purchased was financed through an SBA loan.
The SBA loan, as well as any type of loan, has its drawbacks. Check with your CPA or attorney to determine the degree of personal exposure that the loan might subject you, your partners, or spouse to. It might not be a palatable alternative.
When you are considering an SBA loan, do a Google search on the SBA. You’ll be amazed at how many hits you’ll come up with — I came up with over thirty million!
The Angel Investor
Another article that you might want to look at is the one that I wrote for the E-Commerce Times entitled “Searching for Capital: Small-Cap Options.” In that article I explained the approaches to an angel investor that will give you the greatest chances of success. Since then, I have dealt with a number of such investors and have done some research on the number and quality of such investors.
When I did a Google search for this type of investor, I came up with over six million hits. Not bad! The fact is, there are a sufficient number of angel investors, many of which deal with only one particular industry. Therefore, there might very well be an angel investor that specializes in your particular field.
Angel investors usually give the entrepreneur more flexibility in running his/her business than other types of investors, especially venture capitalists. They also aren’t usually looking for a quick exit strategy. In other words, they’ll “hang in there” with you for a longer time than other types of investors.
The Venture Capitalist
This type of investor usually wants a decent amount of control over the operations of your company. This means that they might want one or more board seats so that they can change the management structure quickly if they are dissatisfied with your performance.
They also very frequently want an exit strategy. This means that they want to know roughly when they can exit their investment in your company and “cash out.” You’ve got to be aware of this fact because many venture capitalists neither want nor expect to be involved in your company for a long period of time.
The Commercial Capital Company
Very often, this type of investor is funded by institutional sources such as pension funds, insurance companies, etc. At other times, they are private investment companies that attract capital from wealthy individuals in order to invest it at a high return in a startup or other commercial enterprise.
The fact is, there are many such companies, and a simple search will provide you with more than enough alternatives.
The lending/investment policies of commercial capital companies vary widely. Therefore, you have to be quite selective in choosing the one that will fit your company’s needs.
This is another alternative for the startup that has a good deal of “sizzle.” That is, the startup that would make an attractive publicly traded stock. Consult your financial advisors as to this source of capital.
The IPO can be an excellent way to raise capital, depending on the interpersonal dynamics of the principals of the company, and what the company has to offer to prospective stockholders.
If you look at my article, “Is Your Company IPO Material?”, you’ll get a very good idea about your company’s prospects for a public offering.
Based upon my experience in consulting with and finding capital for startups, the bottom line is that each situation is unique. What might work for someone else might not necessarily work for you.
The one constant in all of this, however, is that you need a professionally prepared, realistic business plan. Without it, it is nearly impossible to convince a prospective investor/lender to provide capital for your company.
Your startup can earn tremendous financial security and personal satisfaction for you and your family. Going about this process in a professional manner is well worth the effort.
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which provides a wide range of investment banking services to the small and medium-sized business. He is also a frequent speaker to business groups on financial and corporate governance matters. He can be contacted at Ted@capitalsourcepartners.com.