Brief Guide to Startup and Small Business Funding Sources

This week I want to revisit an old topic and remake an old video because every new entrepreneur needs to understand the various funding sources available, and the pros and cons of each, but old stuff on the internet gets buried so this topic needed a little refresher. Plus, now there’s an infographic, so what’s not to love?

Anywho, in addition to bootstrapping the business yourself, there are a number of different funding sources available to small businesses and what type of funding is best for you, as well as when you should use each type, depends on your business type and your growth goals. Making sure you use the right type of funding at the right time can drastically impact your success, so let’s take a look at a few of the most common funding sources:

First up are GRANTS from governments, universities, or other non-profit organizations. These can be an amazing source of funding because you get the money you need, you don’t have to pay any of it back, and you don’t have to give up any ownership in your company. You do have to be careful though, because going after grants can suck up a huge amount of your time and money upfront, they can be very difficult to win, and they often severely limit the scope of what you can spend the money on. Often, they simply don’t provide the necessary level of flexibility, so you should be certain you know all of the limitations associated with a particular grant before pursuing or accepting it.

Another option, of course, is getting assistance from FRIENDS & FAMILY. Often, these people are most likely to believe in you and will be more willing to give you favorable terms on an equity investment or loan. However, it can be very dangerous to mix business with your personal life and you wouldn’t want to jeopardize a relationship that’s important to you, so make sure that you take such investments seriously and treat friends and family like you would any other investor – clearly define the risks and terms – including reporting and control expectations – and then stick to the agreement.

Going the more traditional route, entrepreneurs can also seek out LOANS to fund their businesses. A loan leaves you with all of the control and all of the equity you had before you signed on the dotted line (awesome!) but remember that you have to pay that loan back, plus interest, whether or not your company is a success. Make sure you’re in a position to be able to make payments even if everything doesn’t go exactly as planned (because nothing ever does). Also, business loans for companies with only a few owners typically require a personal guarantee. That means that even though you did what you were supposed to and created a separate legal entity and kept your business and personal finances separate, if you default, the bank could come after your personally owned collateral – like your house – to get their money back. You can also turn to a peer-to-peer lending site instead of a bank for your loan and may be able to get some more favorable terms there. However, don’t think that just because the loan doesn’t come from a traditional bank that you’re somehow less on the hook for your debt.

You also have the option of riding the wave of CROWDFUNDING. Crowdfunding has been getting a lot of press lately as the SEC started to clearly define rules to allow for equity investment on crowdfunding sites, but whether you’re using the original rewards system or the new equity system, the concept is the same – you set up a profile to pitch your project to the masses on the internet and have the potential to raise a little bit of money from a lot of people to add up to your funding goal. If you go this route, make sure you realize how much time and energy it typically requires to run a successful crowdfunding campaign and do your research on the different crowdfunding sites so that you use the platform that gives you the best shot at getting funded. And as with anything else, be sure to read the fine print before you agree to anything.

Another great funding option for businesses that want to grow quickly is entrance into business plan or pitch COMPETITIONS. Not only do you have the chance to win cash at these events, but you also get to promote your business, network, and get feedback from entrepreneurs, investors, and peers. There are tons of these competitions every year, so start researching the ones that make most sense for you to enter and begin getting your name out there. Of course, these competitions can be rather time consuming, are often hard to win, and the prize purse can be puny or plentiful depending on what you enter and where you place. Just make sure you know what you’re getting yourself into before you dive whole hog into the competition circuit.

And finally, the supposedly glitziest funding option is raising money from ANGEL INVESTORS or VENTURE CAPITALISTS. Here you’ll give up a chunk of your company to these investors in exchange for their cash – and, if they’re any good, their assistance. This is where you can get big money for massive growth, but this type of investment isn’t for everyone and certainly isn’t for the faint of heart. Firstly, you have to give up control to these guys – they’ll be checking in on what you’re doing, be on your board, and question your decisions because they now own a part of your company too. Additionally, their investment is based on the expectation of a fairly rapid payout – so be prepared to sell – or, if you really rock it, to go public. This isn’t the way to go for someone who wants to pass the business down to the grandkids. Additionally, be careful of the terms of the agreement. These investors are professionals and are looking out for themselves. Make sure you have an experienced lawyer explain all of the ins and outs of the term sheet to you before you sign anything and take the cash. With that said, however, this can be the way to go if you truly believe you can be the next Google with the right amount of cash up front. VCs are career investors working for investment funds and are handling other people’s money for their investments. Angels are individuals putting up their own cash. Either way, they review TONS of proposals, so make sure you make a good first impression when you approach them and know what’s what in your business plan and financial projections before they start asking questions.

Given all of the options out there for outside investment into your company, it’s important that you take some time to decide what your goals are, where your business stands, and what the best funding option for you would be before you pursue something that may not be the best fit. Consider all of the positives and negatives of each option before committing to a deal.

If you’re still totally confused, ask for the advice of a mentor or other expert. One place you can start is my Funding Your Startup Business ecourse.

Also, check out the infographic below to get a quick guide to what’s what when it comes to funding your startup or small business.

Business Funding Options

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Startup Misconceptions: Raising Venture Capital Means You’ve Succeeded

In my effort to provide useful information to entrepreneurs and aspiring entrepreneurs, I share tons of interesting and helpful articles that I find around the web and think can help answer questions for my followers and help you all move your businesses forward. Often, people write asking me to elaborate on those articles or pieces of those articles so I am starting a series that will do just that. I may combine a few or leave a few out here and there, but I will cover the topics that people most often asked me to elaborate on.

I recently posted an article from RockthePost about common misconceptions people have about launching a new company. The next of those misconceptions that I want to tackle here is the idea that raising funding means you’re a success.

As it’s portrayed in the media, venture capital, startups, and entrepreneurship are all about glitz, glamour, and overnight riches. Because of this, and because of the size of some of the checks that venture capitalists might turn over to entrepreneurs, many new entrepreneurs operate under the misguided idea that raising venture capital money is the goal and that doing so means you’ve succeeded.

The reality, however, is that venture capital investment is not the end goal. By its very definition, it is an investment in the future success of the business. That means that when a VC writes you a check, she’s is saying that she sees success in your company’s future, not that you’re a success right now. If you’d already arrived, how would the investor make money by realizing gains on the increased value of your company?

When viewed in this light, it’s clear that raising venture investment is just one stepping stone on the road to success, and it’s a stepping stone that costs the entrepreneur power, ownership, and control.

Clearly, successfully raising venture capital is an accomplishment and I am not saying that it’s not. It’s great to get the validation of seasoned investors, to know that others believe in your vision and in your ability to achieve it, and to have enough money in the bank to keep the lights on for another month. If you’ve just recently gotten funding, congratulations! You absolutely deserve to celebrate. However, the party shouldn’t last too long because you haven’t succeeded yet. You have to get back to work. Your investors are going to hold you accountable for hitting your milestones and you’ve given up ownership, so you need to increase the value of your company by at least as much as the value of that cash infusion before running through that cash just to get back to where you were. The VC’s check being deposited into your business account does not mean it’s time to kick up your feet.

If you haven’t yet raised venture capital, take the time to step back and honestly evaluate why you’re pursuing the investment and whether or not it’s the best course of action for your business. This isn’t rocket science but BAD reasons to pursue venture capital funding are:

  • You think it will make you look cool
  • You want to be able to pay yourself a 6-figure salary for the same work you’re doing right now
  • You think all startups are supposed to raise VC money

On the other hand, GOOD reasons to raise venture capital funding might include:

  • You’re building your business in an industry with high startup costs and venture funding is the only way to get the necessary amount of money
  • You’re experiencing very rapid growth and in order to maintain that momentum, you will need a quick infusion of a lot of cash

If you’re not sure what type of funding is best for your business, don’t chase venture capital just because it’s the most talked about. Less than 1% of all new businesses in the U.S. are funded by angel investors or venture capitalists and if it’s not the right type of investment for your company you’re going to regret chasing it. For a quick overview of the different types of funding available to new businesses, check out my previous post on just that.

The right type of funding is critical to the success of your business, so make sure you’re making a strategic decision about whether to pursue outside investment and what type of investment to pursue as opposed to making a vanity decision based on the perceived “street cred” of a venture investment. And, if you do raise venture capital, be sure to remember that raising that money means you just won a battle, not that you’ve already won the war. Congratulate yourself and then get back to work!

 

Once you’ve assessed what type of investment would be best for your business, let me know in the comments section below what your strategy is for attaining it.

If you like this video, please let me know by giving it a thumbs up on YouTube and Facebook and, if you think others would find it helpful, remember to share it on social media. Thanks for watching and we’ll see you next week on New Venture Mentor.

Common Misconceptions About Venture Capital

In the world of entrepreneurship, raising venture capital money is often looked at as a success in and of itself. It’s the glitziest form of investment that gets the most attention and most play in the press because many VCs have become mini celebrities and the dollar amounts invested can be quite large.

However, venture investment isn’t right for the vast majority of companies and many brand new entrepreneurs have a lot of misconceptions that will hold them back as they attempt to build their new businesses.

The first misconception is that an unknown entrepreneur with no track-record of building successful businesses, no traction – or sometimes not even a product yet, and no VC connections is going to be able to easily get funding if their idea is good enough. Has this ever happened? Of course. Is it likely to happen? Definitely not.  Venture capitalists don’t hand out cash – or often even take a meeting with you – if there is no reason to believe you’ll succeed because they don’t know you, you don’t have a track record, and you can’t prove demand for your product because most new businesses fail.

Another common misconception is that you will still be in control of your business after taking on a VC investment. When you take an equity investment from a VC you’ve given up ownership and you’ve usually also given up board seats. This means you’re no longer in complete control. Additionally, you’ve committed to striving for a quick exit, whether or not that would have been your management strategy if you didn’t take on the money. You’re now beholden to your investors instead of a freedom-filled entrepreneur.

The third misconception is that VCs will be interested in anything less than exponential growth. You may have a great idea for a business that will experience modest growth and make great money for you, but that’s not a business a VC will be interested. VCs invest in bunches of companies and most of them fail, so they need their winners to carry the returns for their whole fund. That means that if your business doesn’t present the possibility for insanely rapid growth and 100x returns, you’re not looking in the right place if you’re looking for VC money.

Finally, the misconception I find most frustrating, is the idea that you can start looking for investment today and have a check by the end of the month. Raising venture capital is a long process that takes a lot of time and a lot of effort. You’re typically looking at an absolute minimum of 4 to 6 months to get an investment, usually longer. If you’re going to seek out venture capital you need to do so far in advance of when you need the cash. You can’t wait until the last minute and expect a VC to swoop in and save you without any time for evaluation and due diligence on his end.

Don’t be discouraged though. Just because VC might not be the right source of capital for your startup does not mean your business dreams are dead in the water. There are a number of other sources of capital that can get you going. Take a look back at my old funding sources video to get an idea of what might be a better fit for you and your business.

Now I want to hear from you. What other common misconceptions about raising venture capital have you heard? How did you fund your business? What was the toughest part of raising capital for you and how did you overcome it? Share your stories with us in the comments section below.

Also, if you liked what you heard or you think someone you know could benefit from this discussion, please like and share! 

Costa Rica’s Entrepreneurial Ecosystem – Ricardo Arce Interview

Ricardo Arce is the co-owner of InterGraphicDESIGNS and Quazar Web Design as well as co-organizer of BarCamp Costa Rica. He fell into entrepreneurship after college when he was doing freelance programming work, loved the freedom of freelancing, and his business took off to the point that he needed to hire employees and build a company. At the time Ricardo started his business, Costa Rica didn’t have a lot of high-quality web-design companies so Ricardo and his partners -Steven Guzman and Pablo Barrantes- were able to develop a solid reputation quickly and build InterGraphicDESIGNS to 35 employees (a mid-size company in Costa Rica). Computer science and programming are where Ricardo’s expertise lie so he has been learning how to be a entrepreneur as his company has grown and merged with others and has a unique take on the tech entrepreneurship world in Costa Rica and some of its issues.

According to Ricardo, Costa Rica has very high-skilled and well-educated people so it’s been attracting companies like HP and Intel who want to access its human capital. This has resulted in competition for programmers – and a steep increase in the expected salaries for those programmers – that’s forced many of these small web design firms out of the market. In fact, Ricardo says, many Costa Ricans who were entrepreneurs are now employees of these larger, mostly U.S.-based companies.

“The competition now is not for clients anymore, but for human resources…Web design is a matter of talent, of skills, so it’s important that you have the best designers.”

This competition has led Ricardo and his business partners to adapt their company’s growth strategy and has shaped the way they do business:

“[Big companies] can hire a lot of people with good salaries because they are selling in bigger markets. So we can do the same,” he says, “but we need some international presence, we have to change our business model, and we are at exactly this point…Some years ago, 90% of our clients were from Costa Rica and now it’s just 40%.”

While international expansion may sound like any entrepreneur’s dream, it also comes with its own set of hurdles. Until now, Ricardo has built his business by reinvesting the profits back into his company, but he’s currently exploring the possibility of raising outside funding to expand his company’s international presence and he’s noticed that access to capital isn’t so easy in Costa Rica.

For one thing, he says, Costa Ricans just aren’t as educated about or comfortable with the concept of equity investing. This seems to be the case in a lot of the Latin American countries I have and will be exploring, but Ricardo thinks Central America is even less educated about it than Mexico or South America. He says:

“If you look in the Latin American ecosystem as a whole, you can find more opportunities, but if you stay just in Costa Rica you will not find a lot of opportunities. You have to go to Colombia, to Mexico, to Argentina, to Chile.”

But while he sees Costa Rica as not on par with Mexico and countries in South America, he does identify Costa Rica as standing out from the rest of Central America:

“I think Costa Rica is a little bit different [than the rest of Central America] because of the talent. We have the same quality of talent as the countries that we’re talking about [Mexico, Colombia, Chile,etc.], but things with funding and investment are a little bit different. We have not developed that type of culture and ecosystem.”

But that culture is beginning to change as organizations like Startup Costa Rica and Carao Ventures try to fill in the gaps in Costa Rica’s entrepreneurial ecosystem (stay tuned for interviews with leaders from both organizations).  Ricardo sees this progress as good and wants multiple stakeholders to be involved in the ecosystem’s growth because – as he sees it –  journalists, the government, investors, and entrepreneurs all have a role to play. But he doesn’t see this growth happening quickly enough. The culture is changing, he says, but too slowly.

“If you grow slowly and the other countries grow faster, you will always have less even though you’re growing. So yes, we are growing, but we are growing too slowly.”

One sign that Ricardo says shows that entrepreneurship hasn’t taken it’s spot as a highly desired career choice: in Latin America there are a lot of entrepreneurs who are entrepreneurs because they have to be, not because they want to be. In Costa Rica right now there are a lot of multinational companies hiring and offering good salaries and benefits, so people are becoming employees and get comfortable not having the risks associated with building a business. This is happening so much that Ricardo predicts Costa Rica will actually have fewer entrepreneurs (as a percentage of total population) over the next few years.

As a lover of entrepreneurship, I can only hope that Ricardo is wrong and that entrepreneurship in Costa Rica continues to expand, not to contract.

 

Do you have experience with Costa Rica’s entrepreneurial ecosystem? Let me know your thoughts on what Ricardo had to say in the comments below. 

Our next interview will be with Jose Callaso of Sabor Studio.