These days, the option of seeking outside funding to grow a business makes a lot sense for entrepreneurs, especially when you consider the following statement published in a recent Statista.com report:
“According to Thomson Reuter data published by PricewaterhouseCoopers, venture capital funding in the U.S. amounted to $12.97 billion in Q2 2014, which is by far the highest level it’s been at since Q1 2001.”
Thanks to the overnight success of companies like Facebook, Snapchat, Yo, and others, there’s a lot of hype and excitement about startups and a lot of investors who are willing and eager to back them. The question is, how do you decide if you should seek funding for your startup? It’s not the easiest question to answer, especially for first-time entrepreneurs who lack both the experience and confidence needed to make such a big decision.
In my early days as an entrepreneur, the idea of seeking funding was a bit intimidating, mostly because no one ever really told me when the right time to seek funding was, what type of companies investors typically looked for, or what my options were. I didn’t really know where to start.
I’ve sinced learned from experience, however, that there are a number of questions you can ask yourself that can help give you the confidence you need to make the right decision at the right time.
The Questions You Should Ask Yourself
Before you take the time to ask yourself the questions I outline below, consider the following: your business’s funding needs should be based on what your expected costs are. First, make sure you’re not wasting money on needless things. If you’ve got expensive subscriptions, a posh office, brand new electronics, and high salaries, you probably don’t need funding. It’s much more likely you need to tighten your belt and look at your priorities.
But let’s assume you already know that. The best way to determine if you should seek funding and boost confidence is to figure out if you actually have a fundable idea. Keep in mind: savvy investors aren’t looking to help you pay your rent. They’re looking for an idea that’s already on fire and to which they can simply add the gasoline. Ask yourself the following questions:
- Can my business be bootstrapped? Is it better that way, for me and for the company?
- Are there other public companies doing what we do? If not, investors may be reticent to take the risk.
- Are we simply adding a feature to another company’s existing product? If so, what stops the product’s parent company from simply building that feature themselves without you?
- Are we growing exponentially? If not, you aren’t likely to attract investment. Slow and steady may win the race, but it definitely won’t win venture capital.
- Are we making money? If not, how will we promise investors a return on their capital?
- Do we deeply understand our customers? Or do we just have a clever idea that isn’t sustainable in the long run?
Answering these questions can really help give you the confidence you need when it comes time to make a decision about seeking funding for your startup.
The Various Options That Exist
Once you’re sure you have a fundable business or idea, your next step is to choose a funding source. There are so many options today that you’ll never have to take the first ‘no’ – or even the fifth one – as a final answer. Here are some options you’ll want to consider:
- Small business grants. The federal government has initiatives underway to assist in the development of new alternative-energy resources and other new technologies. While it can be a long road to obtain the funding, the government won’t require equity or other control.
- Loans or lines of credit. While banks are sometimes dismissive of startups, a Small Business Administration (SBA) loan can be very helpful. This is a great option if you can get it, and if your company needs a small or temporary infusion of cash.
- Form a partnership. If you can find an existing company that has a vested interest in your product, you may be able to partner with them to make it happen. Licensing can be a very lucrative option, if done right.
- Make an exclusive deal. If you have a major customer on the line to whom you can promise a first-crack option at your product, they may be willing to fund your development. Of course, in doing so, they’ll gain control of your production process so you meet their specifications, which may not be advantageous for your business in the long run.
- Crowdfunding. One of the newest ways to raise money, businesses seeking crowdfunding use sites like Kickstarter and Indiegogo to pitch ideas directly to customers and raise money for development directly from those who are interested in buying. This is a great way to raise money and create a market at the same time, as long as your idea meets certain criteria.
- Incubators. There are organizations – companies, universities, and more – that are willing to give space, money, and resources to startup companies to help them succeed. Incubators, however, generally require equity in return for their investment.
- Angel Investors. Getting in touch with angel investors can be tricky, but if you’re good at networking, you may be able to attract the attention of an angel who understands your business and shares your fire. If you need to raise $25,000 – $250,000 to launch, this can be a good avenue.
- Venture Capital. This isn’t typically the best place for new startups to begin – in general VCs are most interested in companies that need $1 million or more and have a solid foundation. They expect a lot for their investment, as well, so if you meet these thresholds (or have an untested idea that’s sufficiently interesting to them), be prepared to give up some level of equity, creative control and more.
Getting funding isn’t an absolute necessity for every single business. Many can be bootstrapped or funded by friends and family, while others can get by with grants or crowdsourced capital. If you must seek funding from angels, VCs, or incubators, know that you’ll be required to give up some control over your company in exchange for the funding you need. Only by carefully evaluating your business will you know the perfect time and way to develop your dream.
This article was written by Sujan Patel from Forbes and was legally licensed through the NewsCred publisher network.