To have enough money to start; I have a small amount
Answer:
The absolute best source of money is customers.
The more time you spend with your customers the more you will understand their needs and what they will pay for. If you provide a product or service people want to buy, you have instant cash flow and a proven business model.
A proven business model that has cash flow, and maybe even profits, is a lot easier to fund than an unproven idea.
If you don’t have enough existing capital to provide the initial product or service, then invest in market research—talking to and surveying customers—to document and prove market demand.
Proven market demand with survey results, web site tracking data, signed letters of intent or provisional purchase orders is a lot easier to fund than an unproven idea.
Some basics on funding:
If you don’t take in any external money and retain 100% of the company it’s called “bootstrapping.” Bootstrapping is a very viable option for many business models.
The biggest downside to bootstrapping is that it is extremely challenging to win a big market opportunity unless you take in external money.
The reality of bootstrapping is that it is very hard to build a business through profits alone, even in the best of times.
Most businesses need to take in external funding at some point in their life.
There are two basic types of external funding:
- Non-Dilutive
- Dilutive
Dilutive means that you sell a portion of the company to the investor in exchange for the invested money. For instance, if your company is valued at $1,000,000 and you sell 25% of the company in exchange for $250,000 you are left with 75% of the company—your ownership stake has been diluted by the external investment of capital.
Non-dilutive means that obtain capital (funding), but you retain full ownership of the company.
Types of funding that are non-dilutive include:
- Gifts (often from F&F)
- Loans
- Grants
- Prizes
Gifts are typically relatively small compared to what it costs to start and grow a business.
Loans require collateral. Only 10% of new businesses survive 10 years (source: Forrester Research), so startup loans are not good business for banks unless the Small Business Administration (SBA) guarantees 85% of the loan and the bank gets 15% down ( = zero risk for the bank).
Grants are very hard to come by, despite the widespread urban legends that there are a lot of them out there (billions!) and they are easy to get (24 hours!). The reality is that there are lots and lots and lots of people competing for the scarce grants that are available and that grants require a lot of work to apply for and a very long time (typically) to be awarded.
Prizes are like grants – a lot of work with no certain return.
Often overlooked sources of non-dilutive funding include:
- Customers
- Current competition
- Industry associations
- Suppliers/vendors
Of those, customers are the best source and suppliers/vendors the next best. Customers are always looking for something that will give them a competitive or cost advantage and suppliers/vendors are always looking for ways to sell more product.
Some basics on typical external sources of dilutive funding:
- Friends & family (F&F)= money you obtain from people you know or can convince that your idea is worth them investing in you
- Seed = money to cover the costs of you discovering and proving a business model
- Angel = money invested at seed and later stages by private, wealthy individuals
- Super Angel = money invested by an angel from a fund (pool) of money the angel collected from other angels and possibly additional sources
- Venture Capital (VC) = money invested by professional investors who invest from a fund (pool) of money they collected from institutions (retirement funds, endowments, insurance companies, etc.)
Seed, Angel, Super Angel and Venture Capital investments in your business are all dilutive. People who build big companies that are funded by VC typically end up retaining <1% to ~6% of the company in the end. The upside is that it’s a lot better to own 5% of a $400m company than 100% of a bar napkin idea.
Every time you take in external investment it’s called a funding “round.”
Typical funding rounds:
- Seed
- A
- B
- C
- Mezzanine
Entrepreneurs try to retain majority ownership up to the B round, if possible.
You will usually sell 20-40% of the company in the seed and A round stages of growth.
Regardless of the source, almost every business requires external capital at some point, be it a line of credit from their bank or a round of external capital.
The best time to seek money is when you don’t need it. The best time to tell your story is early and often. In both cases, later, when you need the money, the people who can provide it will already know you, your idea and your company.
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