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In my 15 years as an entrepreneur and, now, venture
capitalist, I have seen great entrepreneurs stumble on the path to funding.
They’re super-confident and passionate about their big idea and how it will
change the world, but ill-prepared to finance it. With the news full of stories about banks and credit unions
cutting back on lending to small businesses, here are a few alternatives to
consider when choosing the path to financing your dream.
Venture Capital (VC).
Venture capital isn’t for everyone. Out of the hundreds of thousands of businesses that get started each year, only a few thousand receive venture capital investment. The companies that do receive VC funding typically fit a very specific profile:
If VC money isn’t the right path, then perhaps raising money from “angels” is. Angels are wealthy individuals who invest privately in small young companies. There are numerous professional angels and angel groups that invest as little as $50,000 and as much as $2 million in young companies. Angels are great if you are in a field where others have made a lot of money and if you have a related business. Angels like to invest in people and businesses who look like them 10-20 years ago.
Angels like to invest in people and businesses who look like them 10-20 years ago.
Friends and family.
One of the most popular sources of financing is people who know you well. And who knows and trusts you more than your friends and family? Not everyone has wealthy friends and family who are willing to write $10,000 or $25,000 checks to help finance a business, but many people do. Further, your close friends and family may themselves know wealthy individuals who are interested and willing to write a check.
Former professors, professional colleagues, business partners can all be good sources of capital in this way. In 2008, over 55,000 companies received “angel” or “friends and family” investments, with a total of nearly $20 billion invested from 265,000 individuals. Maybe you can find one of those hundreds of thousands of individuals and convince them to invest in you as well!
Customers.
Many entrepreneurs forget that a compelling source of capital can be their own customers. If you are delivering enough value to your customers, perhaps they will be willing to prepay for your services, or even extend a low-interest loan to you. Make them dependent on your service and you may find they’re willing to lend a hand to keep that great service coming.
Some entrepreneurs have the wherewithal to reach into their pockets and put up their own start-up money. In some cases, this could be tens of thousands of dollars from savings or credit cards. In other cases, the start-up capital required to bootstrap a business could be hundreds of thousands or even millions of dollars. Keep in mind that finding the right path to funding can be as important as the figuring out how to create the business itself.
--
How About You
Have you been bootstrapping your business? What would happen if you sought funding to take it to the next level?
--
Jeff Bussgang is author of “Mastering the VC Game,” the critically acclaimed insider's guide to the world of venture capital and entrepreneurship, available from Penguin at www.jeffbussgang.com.
Venture Capital (VC).
Venture capital isn’t for everyone. Out of the hundreds of thousands of businesses that get started each year, only a few thousand receive venture capital investment. The companies that do receive VC funding typically fit a very specific profile:
- Have breakthrough, game-changing potential
- Require large amounts of capital to get off the ground
- Are usually technology-based in some way
- Require high-priced talent, where “price” may mean rich stock packages as much as, or more than, cash compensation.
If VC money isn’t the right path, then perhaps raising money from “angels” is. Angels are wealthy individuals who invest privately in small young companies. There are numerous professional angels and angel groups that invest as little as $50,000 and as much as $2 million in young companies. Angels are great if you are in a field where others have made a lot of money and if you have a related business. Angels like to invest in people and businesses who look like them 10-20 years ago.
Angels like to invest in people and businesses who look like them 10-20 years ago.
Friends and family.
One of the most popular sources of financing is people who know you well. And who knows and trusts you more than your friends and family? Not everyone has wealthy friends and family who are willing to write $10,000 or $25,000 checks to help finance a business, but many people do. Further, your close friends and family may themselves know wealthy individuals who are interested and willing to write a check.
Former professors, professional colleagues, business partners can all be good sources of capital in this way. In 2008, over 55,000 companies received “angel” or “friends and family” investments, with a total of nearly $20 billion invested from 265,000 individuals. Maybe you can find one of those hundreds of thousands of individuals and convince them to invest in you as well!
Customers.
Many entrepreneurs forget that a compelling source of capital can be their own customers. If you are delivering enough value to your customers, perhaps they will be willing to prepay for your services, or even extend a low-interest loan to you. Make them dependent on your service and you may find they’re willing to lend a hand to keep that great service coming.
Some entrepreneurs have the wherewithal to reach into their pockets and put up their own start-up money. In some cases, this could be tens of thousands of dollars from savings or credit cards. In other cases, the start-up capital required to bootstrap a business could be hundreds of thousands or even millions of dollars. Keep in mind that finding the right path to funding can be as important as the figuring out how to create the business itself.
--
How About You
Have you been bootstrapping your business? What would happen if you sought funding to take it to the next level?
--
Jeff Bussgang is author of “Mastering the VC Game,” the critically acclaimed insider's guide to the world of venture capital and entrepreneurship, available from Penguin at www.jeffbussgang.com.
One of Dan Pena's vintage masterpieces, this video teaches how to find the source of capital you need to achieve your personal dreams of financial independence and success, Bearing in mind that somewhere in the world there is a source of capital waiting for you.
"If you need VC/Angel money it means that either 1. you do not have a product or 2. your product does not sell/scale very good. "
I personally think this is short sited... especially for the technology industry. Think of the SaaS model and the amount of money it takes to pay the developers to build your "product". Even if you have a customer buy in on the idea, they then become an Angel, because no company in their right mind would pre-pay for a product or service that you have not built yet, without expecting something extra when it is done.
"Build it and they will come" applies to customers, but how do you pay your developers or yourself while your product is being built, and you have no paying customers?
rp
Once you have got customers the next step is to find partners, people in the business that may join you and bring more customers on board. VC/Angel money is just that, money. Most of the time it will not bring you the connections and commercial agreements, so you still have all the work ahead. A good partner, reseller, whatever that gives 10 big customers on board may be more relevant than any VC. Mind you that if you get a big sum you may buy those connections. It's another way to do it but I personally prefer to create commercial relationships.
Nice article!