Financing Your Company
By: Rich Kramarik
We are often
asked about how a company can get its initial financing. There is usually
considerable misunderstanding about the various alternatives and their
implications. This article positions the various alternatives that a company
should consider before embarking on a financing strategy.
the time you have the idea for a new company until you are ready to actually
launch the products or services, financing is required to prepare your company
for doing business. Such expenditures are:
Market research and competitive analysis
Business and financial plan development
roduct or services development
Marketing and sales planning
Management team development
Patents, copyrights and trademarks
Incorporation and other legal matters
When you are
still at this idea development stage, there is no opportunity to reach out to
sophisticated angel investors or venture capital firms. Your company is not
mature enough for them to consider it. In order to finance these activities, you
need to consider the following alternatives for seed funding:
Friends and family
Letís take each
one and explain the purpose and implications.
founders of the company have the financial resources to provide the seed funding
of the company. The founders may be successful entrepreneurs or business people,
who have the capability to provide this first round of funding.
This is ideal
in many ways. There is no outside funding required. The founders will own the
entire company in this first financing stage. Future investors will see that the
founders have initially put their own resources into the company.
research and proof of concept have not been established, getting a grant to
complete this work is very advantageous. Sometimes the process of applying for
and administering a grant are long and tedious, but the rewards are significant
in that you usually do not have to repay the grant in any way.
Some of the
most attractive programs are the SBIR grants available through the US government
and its participating agencies. You should contact the Small Business &
Technology Development Center (SBTDC) to determine if you could qualify for a
grant with such agencies as the Department of Defense, Homeland Security, the
National Institute of Health and many others. Also, many of these grants have
matching funds available from state governments. For example, North Carolina is
on that offers such matching funds. Of course, there are many grants that are
possible from private foundations and corporations, all of which should be
investigated to see if your company is eligible.
This may sound
ugly but you may have to consider it. Banks do provide loans for businesses, but
there is no panacea about it. They will want the loan to be fully collateralized
by someone. If you have the assets to provide the backing for the loan, like
stock or other assets, you can do this yourself. Of course, if you had those
assets, you might have considered liquidating them to provide the seed financing
in the first place, but sometimes you may want to keep the integrity of these
assets without liquidating them. Either way, these assets will be locked in by
the bank to back the loan. You can also consider a business partner for
providing all or some of the loan backing as well.
The upside of
this alternative is that you will still retain ownership in your company, but
you will have to pay off the loan whether or not you succeed or fail.
this is the good old fashioned way of getting seed financing. Entrepreneurs
simply go to the people that trust them and know them the best and ask for
funding for their business idea. This form of financing happens every day in
formal and informal agreements between entrepreneurs and their family and
this, you simply create a list of all the people you know who could finance your
company or who could refer you to people who could finance your company. Then,
you approach them with your business idea and offer them a share of the
opportunity for the seed funding they provide.
You will have
to be fair with them in providing an appropriate share of ownership in the
company for the large risk they are taking in financing your company at this
very early stage.
are that you are doing business with people that know and trust you, and the
process to close on funding is usually very simple. The downside is that, if you
fail, you have lost the money you obtained from these close family members and
Finding the initial funding for your company will take a lot of
your time. Spend the time to establish a solid financing strategy and do your
best to be prepared to execute whatever alternative you choose. You will not get
any second chances at this otherwise.
Financing Your Company Case Study
By: Rich Kramarik
Once you have gotten your company through the proof of concept
stage and are now at the point that you have a product or service ready for
market, you will need to finance this phase of your companyís growth.
Many of the alternatives that were considered for the seed
financing of your company can play a role in this stage of financing as well.
The additional alternatives to consider for this stage of financing are:
Letís take each
of these and explain the purpose and implications.
Many businesses are suitable for this form of financing,
especially services businesses. This can be accomplished when you have plenty of
time to get to market and you donít have to spend a lot of capital to acquire
and service a customer. It is very difficult for product companies to bootstrap
themselves when there is a need for funds to pay for capital equipment and
This means that you do not have to sell any ownership in your
company but your growth will be strictly determined by the speed with which you
can acquire paying customers and execute the services.
At the end of the day, you will own most of your company and
reap most of the rewards upon exit.
business may have interest from major corporations who have funds available for
partnerships with companies who will offer products or services that are a
complement to theirs.
how your products or services could be complementary to such companies and
contact them to set up a briefing about your business idea. You want this
meeting to lead to discussions about how the strategic partner could possibly
provide seed funding for consideration of future royalties or other preferred
are not banks, so they will want to have a significant return for their time and
money, but it will mean that you have a lot of influence with future investors
when you have a big partner on your side. You will also have the potential of
not having to sell part of your company to the strategic partner.
When you are
solving a burning problem that some big companies have, you may find an
opportunity for a potential customer to finance the growth of your company for
consideration of future preferential pricing and other financial returns.
Just as you
would with a potential strategic partner, approach these companies with your
business plan with the intent of allowing them to share in your future financial
relationships, you will have to wind your way through exclusivity considerations
as well as intellectual property ownership, but sometimes these arrangement can
be very successful.
Angels are not what they used to be. There are always
exceptions, but for the most part, sophisticated angel investors will
participate in financing a company at this stage, not before.
Get yourself completely ready with your business plan and
financing story to approach angel investor organizations in your geographic
area. Do the research to understand their interests and find people that can
refer you to the executives that run these organizations. A personal
introduction will get you a lot further.
Be prepared for a rather formal presentation and due diligence
process, along with the resulting formal terms that will describe their
investment in your company. This is very expensive money, but may be the only
alternative you have for gaining the financing you need.
View the angels more like partners with whom you will have a
long term business relationship. They will want to provide you assistance
without disrupting your operating of the company. Use the talent and contacts
they can provide to help you get successfully launched.
What about VCís?
Again, there are always exceptions, but institutional investors
will not participate in this stage of financing unless they see the opportunity
to ultimately place over $5 million in your company and have an incredibly high
degree of confidence in your management team and your ability to get some rapid
sales traction. So, spending your time approaching VCís at this stage will
probably not be fruitful, but will put you on their radar screen for approaching
them in the future, once you are at a level of maturity they are interested in.
This stage of funding could be as small as a few hundred
thousand dollars. On the other hand, this stage of funding could be quite large,
up to $2-$3 million in some cases. So, it will sometimes take large pockets to
come up with the financing you need to launch your business. Whatever the amount
being raised, this stage of funding takes even more time to accomplish and the
need for a well thought out business plan and financing strategy is essential to
Brought to you by:
Bob De Contreras
RTBA | Cary | Greensboro | Raleigh | Research Triangle Park | North Caroliina
Contents © Copyright Research Triangle Business Advisors 2008, All rights reserved.