Here is an excellent article by Marc Kramer a serial entrepreneur and contributing writer to the Atlanta Business Chronicle. There are many ways to fund your business as we discuss in class. Many veterans, new to entrepreneurship, believe that a bank loan, the SBA, and debt financing are the primary methods of obtaining funding. You know from class that there are many different equity sources of funding. The key is to find the right source for you and your business. Marc Kramer offers some excellent points and reasons here that must be considered.
Kramer writes - Most entrepreneurs, especially ones who have never run a business before, always believe they need to raise money right away from friends and family, get in front of their local angel group, and/or contact venture capitalists.
There are a lot of risks that entrepreneurs don’t think about when going to the above groups for money.
First, can your friends and family afford to lose whatever they put in? Because the odds are long they will see that money again. Second, angels, who are individual investors and most are current/former entrepreneurs themselves, will be in your shorts as soon as they write the check, wanting to know and see everything you are doing. Third, venture capitalists invest in seed and early-stage companies because they try to minimize the risk by only investing in businesses with positive cash flow.
If you are getting money from investors anywhere except Silicon Valley, they are expecting you to put your own money in. So there is essentially no free lunch. The earlier you take money, the less you keep of your own company.
There are 10 reasons you should consider taking money.
1. Manufacturing product
I sit on the advisory board of a women’s handbag company. There is a good chance a major retailer is going to give them an order that exceeds their bank credit line. They don’t want to miss the opportunity, and they can’t find a factoring company to buy the receivable because they are too new.
2. Hiring sales professionals
The founder is usually the best at selling their own product/service, but once sales go in and you want to take advantage of the market, you need to bring in an experienced pro who will hire a team.
3. Hiring marketing professionals
Founders usually fall into two buckets, good at creating or developing the product, and often sales, because of their passion. They usually aren’t good at overseeing marketing. This means tweeting, blogging, public relations and obtaining speaking engagements
4. Hiring key managers
Facebook, Uber, Microsoft, P&G and any other successful company you can name all need managers to take responsibility for sales, marketing, finance, etc. Entrepreneurs need money to hire quality experienced managers.
5. Introduction to potential business
This happens if you find an investor who can make introductions that lead to game-changing new business. That can potentially transform your business into a leader. Take that money and don’t look back. Don’t get tripped up on the amount of equity they want if they can increase the value of your stock significantly. One of my former clients had investor that wanted 51 percent of the business in exchange for a substantial investment and a guarantee of new business from strong relationships they could guarantee. Unfortunately, my client was more concerned about maintaining control than making money.
6. Name investor
If you get Tim Draper, Josh Kopelman or Don Valentine as your investor, they are “A” listers like Tom Hanks or Meryl Streep. They attract more money, businesses that were on the fence want to do business with you and they can open doors you never thought you could step into.
7. Business requires significant capital
If you have a biotech, medical device, financial service, insurance product idea or want to scale a restaurant idea, you are going to need investors to grow the business.
These investors know how to grow certain type of businesses. In Philadelphia, there is an investor named Kirk Wycoff who founded a company called Patriot Capital. He started a bank and specializes in investing in banks. You not only want his money, but you will be glad you got his expertise.
When LifeLock, it was the only player in the credit monitoring space. Once they proved out the model, many well-heeled companies were jumping in. To keep from being a footnote in credit monitoring history, they needed money to grab as much market share is they could.
10. Market expansion
You may have a hot company like Shake Shack or buyers are lining up for your product, but you need more than bank financing. A famous biotech entrepreneur, Hubert Schoemaker, used to say when they open up the cookie jar, grab all of the cookies you can so you don’t miss your window of opportunity.
Take your business as far as you can, but make sure when you ask for money you have at least six months to a year of running capital, or your investors will have leverage to take more of your company than you planned on giving up.