๐๐๐ข๐ฌ๐ข๐ง๐ ๐
๐ฎ๐ง๐๐ฌ: ๐๐จ๐ฐ ๐๐ข๐ ๐ญ๐ก๐ ๐
๐ข๐ซ๐?
Fires bring warmth and food. They also cause damage and pain.
Your ideas are the spark to something big, and maybe you plan to use outside capital to blaze your business into a huge bonfire.
Beware the benefits and hazards of adding more logs to the fire. This post will cover a range of options to raise money, both common and unusual.
๐ช๐ต๐ฒ๐ฟ๐ฒโ๐ ๐ฌ๐ผ๐๐ฟ ๐๐ฒ๐ฎ๐ฑ
Some founders raise money to launch or continue the business. Others perceive it as a rite of passage or even a sign of success.
To be clear, raising funds is an accomplishment, but itโs also a means to an end - not the end itself.
Raising money may solve some problems and simultaneously add new ones, including investors with opinions and requirements.
Be clear why you are raising and whether the pros exceed the cons with any decision. Some reasons to pull in funds:
๐๐ณ๐ฐ๐ธ ๐๐น๐ฑ๐ฐ๐ฏ๐ฆ๐ฏ๐ต๐ช๐ข๐ญ๐ญ๐บ โ Customers willing to pay and renew shows further demand. You may need funds to now expand significantly.
๐๐ฐ๐ท๐ฆ ๐๐ถ๐ช๐ค๐ฌ๐ญ๐บ โ Taking money is often a tradeoff of time versus equity. If you want to expand or exit faster, you may need funds.
๐๐ฏ๐ต๐ฆ๐ณ ๐๐ข๐ณ๐ฌ๐ฆ๐ต๐ด โ If you need equipment, a long development period, or heavy marketing to reach many consumers, consider raising.
๐๐ช๐จ๐ฉ๐ต ๐๐ฆ๐ข๐ต๐ฉ โ You may need working capital to make the next payroll or to keep up with rapidly growing competition. (Beware: You may only be delaying the inevitable.)
๐ข๐ฝ๐๐ถ๐ผ๐ป๐
There are many ways to raise funds for your business.
Depending on your path, you potentially face lots of rejection as you prepare and deliver your message many times.
You will get lots of tough questions, and if youโre lucky, even some feedback from investors who passed. A growth mindset* allows you to learn and possibly even solve some unknown problems around how your business will operate.
This post will focus on Bootstrapping. Other posts this week will cover Angels, VCs, Crowdfunding, Incubators, Banks, and more.
๐๐ผ๐ผ๐๐๐๐ฟ๐ฎ๐ฝ๐ฝ๐ถ๐ป๐ด
Bootstrapping entails relying on your own funds and support from friends and family to launch and sustain the business.
Depending on your network, you may be able to raise hundreds of thousands. This process can be โrelativelyโ easily and faster since you will need fewer documents, less legal advice, and fewer costs.
Your network may be flexible on interest rates and ask for few restrictions.
If you cannot raise sufficient funds through your own network, then consider starting your business as a side hustle until you have created a business plan and gotten traction.
This process may not capture the funds you need while you get a ton of unsolicited questions and advice.
Be cautious of overcommitting to investors, including unfavorable financial terms or your time to communicate with them.
๐๐ป๐ด๐ฒ๐น ๐๐ป๐๐ฒ๐๐๐ผ๐ฟ๐
Some individuals are willing and able to invest in upcoming startups, either by themselves or through networks to pool resources.
In addition to capital, they can offer mentoring or advice. Some angel investors are highly successful entrepreneurs and others have specific skills (finance, legal, or banking) which can help.
Compared to institutions, you may find that they are easier to access with faster to reply with more favorable terms.
On the flip side, you may have to talk with lots of people to raise enough. Also, if you plan on venture capital later, talk with an expert about not hampering that effort through your terms
๐ฉ๐ฒ๐ป๐๐๐ฟ๐ฒ ๐๐ฎ๐ฝ๐ถ๐๐ฎ๐น
Managed institutions offer funds raised from limited partners, both affluent individuals and organizations.
VCs seek a huge upside to satisfy their investors and to cover their bets in other startups (many investments will not yield a return).
VCs can provide expertise, mentorship, and connections to potential clients, opportunities, and strategic direction.
Most VCs have worked with many startups and see patterns of success and failures and will share their insights from a high level.
Keep in mind that the VC is often a long-term relationship over many years. Consider interviewing the partner(s) who will spend time with your business and asking other founders about their experiences.
VCs want companies with high growth potential, a strong team (or advisors and fractional leaders at earlier stages), and solid product and traction, depending on the round of funding.
Pitching them will require well-prepared and often-presented pitches that will require a lot of time and energy from you and team.
Any investing firms will monitor your progress and expect regular updates (e.g. monthly or quarterly meetings and reports).
The scrutiny can vary, but expect a strong emphasis on a 7-10x return in three to seven years, so plenty of pressure to grow quickly.
VCs often ask for a board seat and that may mean that investors outnumber founders in board meetings, thus in control.
Even supportive VCs have a fiduciary loyalty to their limited partners and that may not align with you and your co-founders, the companyโs values and culture, and ultimate company destination.
๐๐ฟ๐ผ๐๐ฑ๐ณ๐๐ป๐ฑ๐ถ๐ป๐ด
There are some wonderful stories of companies crowdfunding their way to success. However, they represent the extreme, not the norm.
The platform is a great way to communicate your passion directly. If people believe in you, they can sponsor and share your work.
Crowdfunding may raise a lot, even more than expected. It helps to gauge interest in your business before launching, and can create buzz through free marketing and piquing investor interest.
It all may sound wonderful. A lot of other founders think the same. There are numerous founders vying for attention across sites.
You may lose interest if someone else pitches a similar idea or if your vision, content, or imagery fails to resonate with users.
Keep in mind that projecting the right message and visuals may require professional services (e.g. writing, editing, video production).
While some founders appreciate few demands on the money raised, others may benefit from more advice and support.
๐๐ป๐ฐ๐๐ฏ๐ฎ๐๐ผ๐ฟ๐ ๐ฎ๐ป๐ฑ ๐๐ฐ๐ฐ๐ฒ๐น๐ฒ๐ฟ๐ฎ๐๐ผ๐ฟ๐
Incubators and accelerators strive to nurture a newly formed business and normally run for 4-8 months.
Business owners often receive useful mentorship and potential introductions to investors. You also connect with other startups.
The downside is that you may feel too little pressure (which helps some founders) or funding (you may need to keep a day job).
๐๐ฎ๐ป๐ธ๐, ๐ฆ๐๐ ๐๐ผ๐ฎ๐ป, ๐ฎ๐ป๐ฑ ๐ข๐๐ต๐ฒ๐ฟ ๐๐ผ๐ฎ๐ป๐
Rather than give up equity or approach individuals to help, you may turn to various types of financial institutions.
๐๐ข๐ฏ๐ฌ ๐ญ๐ฐ๐ข๐ฏ
Banks can offer large amounts of capital and help in other ways, such as introducing potential clients (although rare) and investors.
The more borrowed, the more diligence the bank wants. If the business lacks assets, or the recommendation of a large investor, then the bank may ask for a personal guarantee and covenants.
๐๐ช๐ค๐ณ๐ฐ๐ญ๐ฐ๐ข๐ฏ๐ด
Small Business Administration (SBA) and other groups provide seed loans to businesses. They're relatively easy to obtain, demand fewer requirements and restrictions, and offer lower interest rates.
They are usually not large but could provide enough to last a few months.
๐๐ฏ๐ด๐ฆ๐ค๐ถ๐ณ๐ฆ๐ฅ ๐ญ๐ฆ๐ฏ๐ฅ๐ช๐ฏ๐จ
Some organizations provide funding quickly and easily. The cons include a personal guarantee, limited funds, owed in part or whole in short time frames, and debilitatingly high interest rates.
This is only a good option if you need funds briefly so the business can continue operating and growing.
๐๐ฟ๐ฒ๐ฎ๐๐ถ๐๐ฒ ๐ข๐ฝ๐๐ถ๐ผ๐ป๐
Let's cover some other ways to maintain cashflow. Some are lasting while others are temporary in order to cover a dip.
๐๐ณ๐ฐ๐ฅ๐ถ๐ค๐ต ๐๐ณ๐ฆ-๐๐ข๐ญ๐ฆ: If you can sell your product to clients before incurring most of the costs, that could also help you gauge product interest, prioritize features, and receive other valuable feedback.
๐๐ฆ๐ณ๐ด๐ฐ๐ฏ๐ข๐ญ ๐๐ณ๐ฆ๐ฅ๐ช๐ต (Loan or Credit Cards): Some founders are willing to put themselves in debt for what they believe. While we hear incredible success stories with this approach, we never hear of most founders who ended up paying off that debt for years, so beware.
๐๐ฆ๐ญ๐ญ๐ช๐ฏ๐จ ๐๐ด๐ด๐ฆ๐ต๐ด: Whether a planned pivot or a necessary move to keep open, some founders sell assets (real estate, inventory, domain names, even intellectual property) to keep the business going.
๐๐ข๐ค๐ต๐ฐ๐ณ๐ช๐ฏ๐จ: If you have a lot of reliable receivables and need the money sooner (e.g. seasonal business or SaaS companies where growth takes time), you can get a loan based on the receivables.
๐๐ข๐บ๐ฎ๐ฆ๐ฏ๐ต ๐ต๐ฆ๐ณ๐ฎ๐ด: If facing a temporary cash crunch, you can work with customers to cover that gap. To bolster cashflow, try offering a deep discount for paying up front, lowering payment terms (e.g. 30 days instead of 60 days), and asking renewing clients to pay early.
๐๐ฎ๐ฑ๐ญ๐ฐ๐บ๐ฆ๐ฆ ๐๐ฏ๐ท๐ฆ๐ด๐ต๐ฎ๐ฆ๐ฏ๐ต: You may already have employees with some tradeoff in compensation and equity. If you face a cash crunch, you can approach employees (some or all) and ask if they are willing to defer pay for a limited period. This could be enough to bridge a gap.
๐๐ญ๐ช๐ฆ๐ฏ๐ต ๐๐ฏ๐ท๐ฆ๐ด๐ต๐ฎ๐ฆ๐ฏ๐ต: Occasionally, some clients are so excited about your business that they will invest in your success. Consider if their business and values align with yours and avoid exclusivity, unless youโre willing to change from entrepreneur to employee.
๐๐ผ๐ ๐ ๐๐ฐ๐ต ๐๐ผ ๐ฅ๐ฎ๐ถ๐๐ฒ?
There are several lines of thinking here:
๐๐ช๐ญ๐ฆ๐ด๐ต๐ฐ๐ฏ๐ฆ โ You want to raise enough to reach the next milestone, whether a next round, product stage, or sizable customer acquisition.
In calculating your runway, include all expected costs (more team, overhead, new resources, etc.) to ensure you ask for enough.
๐๐ฐ๐ง๐ง๐ฆ๐ณ๐ด - Some founders like to raise more than is needed now to ensure against unexpected emergencies or a dried-up market.
Realize that raising more will also increase your dilution.
๐๐ข๐ญ๐ถ๐ข๐ต๐ช๐ฐ๐ฏ โ You want to raise with a favorable valuation, one that does not dilute you too far ๐๐๐
leaves you with future options.
Note: Some valuations are so high, it will be nearly impossible to raise again or to exit.
๐๐ณ๐ฐ๐ง๐ช๐ต๐ข๐ฃ๐ช๐ญ๐ช๐ต๐บ ๐ท๐ด. ๐๐ณ๐ฐ๐ธ๐ต๐ฉ โ If you have no limit on how much your business can grow, engage investors looking for a big return.
If you only want enough to reach profitability, then consider money from non-investors which you can easily compensate.
๐๐ถ๐ป๐ฎ๐น ๐ง๐ต๐ผ๐๐ด๐ต๐๐
๐๐ช๐ฃ๐๐ง๐๐๐จ๐๐ฃ๐ ๐ฌ๐๐ก๐ก ๐๐ก๐ฌ๐๐ฎ๐จ ๐ฉ๐๐ ๐ ๐ข๐ช๐๐ ๐ก๐ค๐ฃ๐๐๐ง ๐ฉ๐๐๐ฃ ๐๐จ ๐ฎ๐ค๐ช ๐ฉ๐๐๐ฃ๐ .
Fundraising takes time, figure at least 3-6 months.
Fundraising happens in addition to maintaining and growing the business. You need cashflow now and want to have good numbers to present in future presentations.
You may even start fundraising before you know itโs definitely necessary simply to ensure the option remains if you decide for it.
๐๐ข๐ฅ๐๐๐ฉ.
With all these options, consider the impact on co-founders, and current investors, and employees. And you.
Starting, building, and growing a business is an incredible strain. Fundraising adds to your effort โ nothing else magically goes away.
The process is a chance to learn and to reach your dreams but adds another layer of stress on you and other stakeholders.
๐๐๐๐ง๐ ๐๐จ ๐ฃ๐ค ๐ง๐๐๐๐ฉ ๐๐ฃ๐จ๐ฌ๐๐ง.
Your needs, timeline, vision, and values are unique.
Others may insist they know the right option for you (just like a surgeon may recommend surgery).
This is one of those times when you should get a lot of input and then decide what is best for you.
Fire can be used in many ways to make life better and worse. Fundraising is equally valuable and dangerous to reach your vision.
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Photo by Mikhail Nilov who can be found here: https://bit.ly/3EaRkPy