We have all thought, “If I had more money, oh the things I could do…” Typically, more operating capital does makes things a lot easier when starting out, but at what price? Most of the time you have to give something to get something and the key is finding the right balance for you.
There’s no perfect model for funding your enterprise, but the good news is that you have options. Choosing the best model for your business will be based on how much money you need combined with how attractive your business model, timeline, and personal track record is to investors.
How are you going to get from point A to B? That’s one of the first things any lender or investor wants to know. A solid business plan should clearly demonstrate how you will use their money to grow your business and drive revenue so you can begin financing your startup. Structure milestones of success into your business plan to use as tools to track if goals are met. Your business plan needs to be easy to understand - and if your skills lie elsewhere, consider hiring a consultant to write your plan or use time-saving software like this.
Division of Shares
You may be the sole owner or you may have partners or other stakeholders, and soon you will have investors. Your business plan must clearly define stock ownership and rights for each stakeholder – this is critical. Empires have been lost because of grey areas here. This is where a lawyer, YOUR lawyer, comes in very handy. Remember friends are friends, but business is business.
Venture Capital vs Angel Investors
Is there such thing as too much money? Depending on the nature of your business, the answer could be yes! Venture Capital firms often have a large minimum investment quota - they need to put a lot of money to work to fit their model. VCs raise large amounts of capital from institutional investors and engage strong governance, including requisite board seats and complex deal terms to protect their investments. They also provide significant resources, expert mentorship and strategy but if you’re still building your product or service, and not yet building or scaling your company, that may be overkill. Here’s where Angel Investors step in.
Angels invest smaller amounts, often less than $250,000 and usually do not require board seats or control of subsequent funding rounds to finance your startup. They are also able to make quick decisions and do not impose complex terms but will certainly have ROI goals as well their own vision for the company - make sure your goals align. Also, keep in mind that unlike VCs, Angel Investors usually cannot provide any formal resources to help build your business.
Seed Investment / series A / series B / series C-Z
Venture Capital Funding often comes in rounds as a company hits specific stages. First off, a Series Seed is intended for a company to figure out its product, its market and its consumer base to gain some initial traction. The company may scale to several employees beyond the founders and launch an early product. Next rounds of funding - Series A, Series B and Series C-Z - usually reflect specific growth stages of the company.
Series A – The company utilizes funding to: optimize and scale distribution, scale across verticals or geographically, or evolve the business model. Start-ups are increasingly using platforms such as Onevest or SeedInvest as equity crowdfunding becomes more established.
Series B – Scale, scale, scale – Scale the business model, expand the consumer base, improve the product, or make acquisitions. By Series B you should already know what it costs to acquire a customer and if you are really sophisticated, you know just how much awareness you need to buy or earn with additional funding to turn into loyal consumers.
Series C and on – Learn and optimize – The company may know where profits are but is making tradeoffs to win the market – time to right the ship and maximize revenue!
Convertible notes are structured as loans with the intention of the outstanding balance of the loan converting to equity at a designated point. ‘Notes’ are often used when the start-up and/or seed investors wish to delay establishing a valuation until a later round of funding is achieved or at a designated milestone. Seed investors are sometimes compensated for the risk of investing in the early round, by additional clauses, such as caps, and or discounts to stock purchase price so they can provide funding for your startup. It’s a little confusing at first, but being able to comfortably and intelligently speak about Convertible Notes with potential investors can be a very powerful asset. Get the 411 here.
Sweat Equity & Capital
Many entrepreneurs will opt for a profit-sharing arrangement between a capital partner and a ‘sweat equity’ partner, who has a salary as well as small stake in the business. Sweat equity is a fancy way of saying someone’s gonna put in a lot of hard work instead of cash for a piece of the business. Agreements will often vest the sweat equity partner’s share over a number of years to keep him/her motivated while capital partners may have an optional exit strategy allowing the sweat equity partner to take over the business. It’s all negotiable and every agreement is different - just make sure you are getting what you pay for.
Is Crowdfunding an option?
Crowdfunding is a revolutionary new option for financing your startup that has additional benefits for certain types of businesses. While in some industries, like finance, crowdfunding may raise some eyebrows, in entertainment, consumer products, and technology, crowdfunding creates awareness, grows a consumer base, generates an email list and social following to communicate with, and tests demand in your product before you launch. In a successful campaign, crowdfunding takes can take on life of its own, sparking word of mouth and viral online activity about the success of your campaign – which drives even more awareness! While you may still have some concepts in-development or choose to protect selected IP, your vision and demonstration of know-how will be needed to rally the crowd.
Crowdfunding models fall into two categories – Rewards Crowdfunding (a presale or alternative give-away model) and Equity Crowdfunding. Platforms vary by fees, operating structures, and most importantly, vibe. Identify the platform whose user base and focus mostly closely aligns with your business and study which campaigns are successful and which ones are not – this is definitely the best place to start before diving in.
Friends and Family - A Blessing and a Curse.
Funding from friends and family offers the immediacy of support from individuals who already believe in you and are personally invested in your success. The hazard is that when you go this private, you lose privacy. The key to making the relationship work – the imperative – is to establish a communication schedule and signed formal agreements as you would with an institutional funder. This creates a set of expectations, boundaries and a protocol for behavior as your business goes through its growing pains. Avoid confusion and conflict by sticking to the plan because although they may be your friend or family, as the old saying goes, “money changes everything”.