Many entrepreneurs evolve following downsizing and layoffs from large companies. Entrepreneurs often seek to create a business that they understand, hence the emergence of new banks in the Charlotte area and the rest of North Carolina. Some believe the startup is the quickest way to a salary after becoming unemployed. A salary may be possible if the intent is to buy a small ongoing business already making money. However, it is important to realize that a newly created company or startup is NOT LIKELY to produce a salary in the near future. Entrepreneurs need to have alternative means of keeping up with their expenses. Sometimes for prolonged periods!
Startups typically have no cash and no prospects of funding in be beginning. You may want to read “Most Startups Get No Professional Investor Cash” by Martin Zwilling. You will have to seek funding at some time in the evolution of the business. You may find another article useful: “200 of The Best Resources To Help You Raise Venture Capital” by Thomas Oppong. There are many ways of getting free stuff and it is possible to use equity rather than funds to compensate. Regarding free stuff, if you are building a company in the IT sector, you may want to look at: “Best Free and Low Cost Resources for Small Business Owners” by Amanda Fischer. Before you start seeking funds, give consideration to what taking funds from others means. You are taking partners! A few ideas to consider are in the article “Six Tips on Taking Outside Investors” Tom Szaky. A brief summary of select points from the articles mentioned and other considerations are:
- Most Startups do not attract professional investment for a while. Be prepared to survive for a prolonged period of time. Feel pleased should money start to flow quickly because, someone thinks you are doing something right and believes prospects are good.
- Self-funding is a great option if you can afford it. Be prepared to maintain your personal financial needs: keep your day job, take out a loan, live on savings, and look at other alternatives. You must be prepared to go the distance. Otherwise, the startup will not ever really get a chance to develop.
- Friends & Family are potential sources. In addition, sovereign wealth funds and integrated high-net-worth networks can be considered. The article in entrepreneur.com “Five Tips for Asking Friends and Family for Funding” by Eileen P. Gunn provides a few ideas and strategies when approaching and managing family and friends as investors.
- Small business, SBIR, Government, State Grants and/or loans are sources. The military, NIH, and NSF can also be considered. There are also not-for-profits specific to certain diseases that fund programs. Most of these agencies that give grants or fund programs have websites that will provide information on how to apply.
- Loans or lines-of-credit. It is recommended that you do NOT borrow against your house to start a company that will need substantial amounts of cash over a long period of time. Consider a loan if the startup is small businesses with immediate cash flow adequate to help with payment of the debt. In addition, you need to feel confident and secure enough to owe money. In some cases, it is possible to borrow from certain state agencies using the technology as collateral rather than personal assets. This helps protect the entrepreneur and only leaves the technology at risk.
- Startup Incubators sometimes provide space and services for equity. There are a number of such incubators around the USA. You may even be considering a few such locations in Charlotte, NC. Discuss the option of giving equity for services and space. Giving up equity can decrease the burn in the early days when the cash is important and scarce. Make sure you look at all aspects of any equity arrangement to ensure you protect your startup.
- Angel Investors (high-net-worth individuals or groups) and VC. Angels often like to get involved much earlier than the Venture Capital (VC) group. Some Angels also like to become active participants in the company to help create value. VCs usually get involved when the company is more developed. You will start to lose control as equity is given for the cash and your ownership will start to be diluted on a percentage basis. Dilution can affect your potential financial gains and, as ownership shifts, the financial investors could want to make management changes and ask founders to leave the company. Wed3 and IMAF (local and a state) are two local groups to Charlotte, NC. There are also angel networks in other parts of the state and a national angel network. Search the internet and follow up with those that seem to be candidates for your business.
- Equity or future revenue streams could be traded for services. You are giving equity (paper) today and the recipient is accepting a potential for increased gain in the future, if the company does well. This may be a reasonable swap if it helps to create value for both parties. Equity as payments can also be a good way to hire initial staff. This is especially true for those former executives that have financial resources and can take a risk. Typically, the former executives are experienced and occasionally willing to invest in the business.
- Licensing or Partnering with a BigCo or Vendor. It is possible to create deals on a Win:Win basis where the partner will pay upfront cash fees, milestone fees, royalties, and other payments. Some partners will invest or co-invest in the present or future offerings because they want access to the technology.
- Commit to a major customer. This is something to consider for technologies which are user oriented. They are more difficult to do around certain products like those in the medical area for example.
Before you start looking for funds, make sure you are well prepared, have a presentation, business plan, and have vetted your technology well. Clearly identify the potential marketed products of the business and the product advantages over any potential competitors. Investors interested in startups are seeking substantial returns. These investors want more than traditional investments in stocks. They are expecting returns that compensate for their significant investment risk like: 1) operational, the company fails to execute well, 2) regulatory, some agency like EPA, FDA, or USDA will not approve your product, 3) commercial, your product does not meet expectations on sales. Other risks include; 4) IP, is there a “Freedom to Practice”, 5) flawed science, there are other risks associated with many technology related areas as well as with the management team. The higher the Risk, the more the Reward expected by investors.
Many VCs seek to gain 5-10 times their investment in as little as 3-5 years! If you need $15MM, they want $75-$150MM in 3-5 years! This means your product(s) have to generate potential sales that can make the company appreciate in price sufficient to allow them to capture their desired returns.
Be creative and vary the approach finding strategies that work for you and your startup. If you are creative, you will likely find other ways to get the company off the ground with limited resources.
You can follow Taffy Williams on Twitter by @twilli2861and you can email him with questions at [email protected]or contact him via company contact info in the website. More Startup information is contained in his personal blog.