As I come up with business ideas and get into the details of creating a business, I wonder how companies fund their business when they first start.
In order to get your business started, you need to raise capital to fund your business. Capital is the main ingredient for running a business, if you don’t have capital your business will not survive.
Raising capital will allow you to purchase goods, pay employees and rent an office or retail space. You can think of fundraising as an investment for your business for which you need to make a return with.
Show Me The Data
First you need to determine how much money you need to raise to run your business for a certain amount of time. You need to calculate your startup costs, operating costs and create financial projections for expected sales and when your company is expecting to be cash flow positive.
You want to show your potential investors that you have done your research when it comes to your market and industry. You need to show that you understand who your competitors are and who is dominating the market. I take a deeper dive into market research in my article on how to start a business.
You will need to have a strong marketing strategy and make sure you communicate your goals to your potential investors. You should communicate how you will acquire customers and you should also understand how much it costs to acquire a customer.
For example, how much does it cost to run ads? How much does it cost to go to conferences and meet potential customers? If you need more information regarding marketing strategy my how to start a business article has more information.
Once you have this information you are ready to raise capital. There are different ways you can go about raising capital, here are some of the most common ways entrepreneurs fund their business.
Types Of Investors
An angel investor is someone who invests in the early stage of a startup. Angel investors usually accept equity in exchange for the cash investment to the company. Angel investors are usually looking for a higher rate of return for their investment portfolio and they usually do a one time investment in the company unless otherwise specified.
This type of investment is great for getting a company started because angel investors are more willing to take risk on the loan unlike venture capitalists or banks who want to assume less risk.
This can be a great investment if your potential angel investor has experience and history in your industry, they can provide direction for your growth as a business owner or strategy for your industry or product. Angel investors can be found through family or friends but there are also software apps that can connect you with an angel investors such as angel.co.
Friends And Family
Investment from family and friends should be treated the same as any investor. Create a pitch deck and/or presentation that includes financial projections, business plan and repayment terms. Make sure you continue to provide updates regarding the business and communicate the chances or failure for your business. It is best to have clear communication and expectations regarding their expectations.
You may have to use your own money to fund your new business. This is called bootstrapping, bootstrapping helps you learn to focus on the essentials of the business. This is usually what happens in the very beginning of starting a business because it can be hard to raise capital or you may want to test your idea with your own money first.
Bank loans are likely better for a business that is established because bank loans may have a higher rate and less negotiable payment terms. There is more risk taking a bank loan at the early stages of your company because you will need to start paying them immediately. At the beginning stages of your company you need to make sure you have the maximum amount of cash flow to reinvest back into your business for growth.
Venture capital is for larger startups that are looking to raise millions of dollars for business growth. Venture capitalists usually exchange capital for equity in the company and/or a spot on the board of directors. Consider the venture capital group that you are requesting capital from, you want to make sure they invest in your industry this can add value with connections and industry experience.
With these options you’ll be able to get funding for your business so you can grow your business.
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