You came up with a billion-dollar idea, ready to disrupt your industry.
You developed a solid business plan and you have a clear vision of how to execute the strategy. You got the know-how and you are aware of going on what happens in your industry. The only missing element? A startup capital.
Sounds familiar? Then this article is for you.
According to Fortune, running out of cash is the second reason why early-stage companies fail. While most founders are focusing on fund-raising, what consumers want and how your service will make their lives better are the aspects that matter. Unfortunately, that is the most wide-spread reason of failure – unsuccessful startups build products that no one needed.
However, there are various ways of raising capital, starting from the traditional ones:
- Own savings
- Loan on a house
- Loan on investments from friends
- Credit cards
- Bank loan
- Investment in share capital
- Selling out the stocks
- Terminal wages
- Government grants and subsidies
- Venture capital/Private equity
- Accelerator programs
There are few more options available, yet very few entrepreneurs are using them. Reasons are that the opportunities presented below take some time to find; it takes patience to fill the applications form; and you need to become experienced to successfully compete with those few who also discovered them. Here they are:
- Loan on a policy – a loan issued by an insurance company that uses the cash value of a person’s life insurance policy as collateral. Sometimes referred to as a “life insurance loan.” Traditionally, these were loans issued at a very low interest rate, but that is no longer the case. If the borrower fails to repay the loan, the money is withdrawn from the insurance death benefit.
- Elevator pitch challenge – a startup event where applicants compete to secure prize money, services and/or mentoring from experienced business leaders.
- Business plan competition – this opportunity to receive equity-free funding, which is normally offered to starting companies with a well-thought business plan, traction and/or market potential. Sometimes the innovation of the product or service plays a role.
- Crowdfunding (also called “crowdsource” funding or social funding) – this is an emerging way of getting funding without giving away a stake of your company. You would run a promotion within your network, your friends’ networks and the community of the crowdfunding platform and ask for money in exchange for your product/service. Besides getting some capital, this is an opportunity to get your first clients, raise awareness about your product/service, and – most importantly – validate your business concept.
Last but not least: get investors who would offer you cash for a stake of your company or revenue.
Finding investors is easier than a lot of people think. In fact, they will find you instead, especially if your product or service is showing some significant market traction already.
Yet, getting the right investors for your company is another aspect to consider. If your values, personalities and needs are not aligned, it can spell disaster for the union. As Stefan Glaenzer, partner at Passion Capital, said: “if you are not happy with your marriage, you can apply for a divorce. If you are not happy with your investor, there is no legal way to let him go from your company”. Because of this, it is critical that you conduct due diligence on your investors before inviting them to invest into your company.
The capital can come through an equity crowdfunding site, an individual angel, a private equity firm or other sources.
Here’s the take of other investors on this: “we’ll always look for entrepreneurs who demonstrate to us their willingness to “put their money where their mouth is” and who clearly “have skin in the game.” If we don’t see indications that they believe in their vision enough to invest their own hard-earned cash, then we won’t invest either.”
The investor will evaluate a company’s potential based on the following criteria:
- Does a product or service address a large and growing market need?
- Can a company scale quickly enough to take advantage of that market opportunity?
- Does a company have a defensible competitive advantage?
- Can the management team successfully execute their outlined vision?
There are multiple ways to find these angel investors and get them on board. Here are some of the ways to get:
- Family and friends. Without a doubt, most entrepreneurs turn to neighbours, old classmates, relatives or other loved ones when looking for seed money. The option has become popular again as people’s home values, market investments and retirement plans have stabilized.
- Angel Groups. Finding angel groups is not an easy task, but once you get access one of them, it usually opens the door to up to 50 individual angel investors, giving you great odds. There is also such a thing as venture capital clubs who actively look for deals to invest in and want to hear from entrepreneurs looking for capital, which is basically the same thing, but angel groups do not like the formality of these clubs and instead use more of an informal approach.
- Equity-based crowdfunding is becoming more and more popular because of the potential return on your money. When you provide money to a company via an equity-based crowdfunding site, you become a shareholder of that company. This model is more appealing to a venture capitalist that has a larger amount of money to invest, generally speaking of around $100 thousand up into the millions, while the average amount invested via angel groups is around $250 thousand.
As you can see now there are a lot of options for start-up capital searching and you can start expand your business. The only thing you need always to remember: if you want to generate cash flow for your business – find your consumer and never let him go.