9 Funding Tips for Entrepreneurs
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Today’s Question: One of the biggest challenges any entrepreneur faces is finding money to fund their startup. What tips do you have to help entrepreneurs get the capital they need to succeed?
1. Target the Right Investors
Really target the appropriate type of investor. They all are different. Potential investors include:
– The “Three Fs” – i.e., family, friends, and fools.
– High-net-worth individuals.
– Various funds, including angel, venture, hedge, and pension.
– Strategic alliance partners who can add more than just money.
— Jack Killion, Author, Network: All the Time, Everywhere With Everybody
2. Legally Form Your Company as a C-Corp
Many V.C.s require this as a prerequisite before they’ll even consider investing in a new startup. There are a few reasons why:
– Liability: C-corps appear to provide the strongest corporate veil, minimizing the extent to which investors in the corporation are exposed to the company’s liabilities.
– Pass-through: Most of the other legal structures do not provide complete separation between the company and its shareholders.
– Stock Options: C-corps can have stock options plans, which are often valuable tools for recruiting and maintaining talent in a corporation.
– Familiarity: C-corps are well-known structures with lots of case law surrounding them, making navigating the legal jungle easier.
— Natalie Fratto, Common Legal
3. Kick in Some of Your Own Money
Invest your own money in your company, no matter how little. It’s a sign of confidence to other investors/lenders that you’ll return capital to them.
After all, if you don’t believe in yourself, why should they?
— Claude Burns, Noble Brewer
4. Write a Business Proposal Before Seeking Investors
One of the most important factors is to have a written business proposal with an executive summary that investors can consider. A business proposal enables you to clearly articulate the viability of your business; its target market potential, prospects, and profitability; and how you will achieve the objects of the business in the short and long terms.
— Victor Kwegyir, Vike Business Services
5. Know Your Options
Banks typically consider any business that has been operating in business less then two years a startup. The following tips will help you with funding options if you’re in that “startup” category:
1. Business Line of Credit (0+ years in business)
New business owners can apply for a business line of credit as soon as they have set up their business entity (e.g., an “LLC” or an “Inc.”). Getting approved requires a minimum credit score of 680.
2. ACH/MCA Loan (3+ months in business)
This type of loan can be applied for at 3 months in if you business has maintained an average daily balance around $2,500 in a business bank account. These loans tend to come at a high cost.
3. A/R Financing (3+ months in business)
If you have outstanding receivables, you can leverage them for quick access to cash. This is a good option if cash flow is tight.
4. Equipment Leasing (6+ months in business)
This is good for startups to use when they need to acquire equipment but can’t yet purchase it outright. You can make monthly payments, and your fees are based on your credit profile.
— Ricky Nila, Lending Attic
6. Understand Your Audience
You need to be able to see things from the bank’s perspective. They’re not in the risk business – they are in the “as little risk as possible” business, and that’s what you need to be able to demonstrate to them. If you need risk capital, don’t go to a bank!
— Jo Clarkson, The Alternative Board
7. Know What You Actually Need
Many entrepreneurs want more money than they actually need simply because money is the easy answer. Everyone wants to launch their product fully loaded, but that is generally a terrible idea.
What entrepreneurs should strive for is launching a functional product, also known as a “minimum viable product.” For that, you’ll need significantly less capital. Features are nice, but if your core product can’t fly on its own, then the idea needs reevaluation.
When you walk into a meeting with an angel investor or venture capital firm, you should have two numbers in mind: Your minimum viable product cost and the cost of the full-blown product. When you present these, it will show that you’ve thoughtfully considered your costs and that you truly care about resource allocation. Potential investors will know what the barebones costs are, as well as what the costs will look like for a more robust product later on.
It’s nice to aim high and get a little less, but you don’t want to scare investors away with pie-in-the-sky visions and their pie-in-the-sky costs.
— Kris Phelps, Wealth Artisan
8. Set a Deadline
One of the biggest challenges while fundraising is closing the deal with investors. Patience is a virtue, and some investors need a little encouragement.
My pro tip is to set a deadline for when the money should arrive in your bank – e.g., This round of fundraising closes this Friday, on XYZ date, at XYZ
— Ninh Tran, HireTeamMate
9. Bootstrapping Is Rarely a Bad Idea
My best tip is to be wary of taking money from investors. Everyone has this idea that once you have obtained a million in seed funding, you have succeeded. In fact, what you have done is turned your own business into a job working for other people (more or less, depending on the nature of the funding agreement).
It is far better to bootstrap the startup and stay in control, if at all possible. Stay lean and mean; only reach out for funding when you are in a strong position and can negotiate more favorable deals.
— David Mercer, SME Pals