Thu, Feb 16, 2012
Small business owners need serious cash to get their ideas off the ground. Which type of small business financing is right for you?
We asked a group of entrepreneurs who have collectively raised millions of dollars about the good, bad, and ugly of small business financing.
First – Is Capital Even Right for You?
When considering investors for your small business, you’ll hear a lot about “angel” versus “venture”; be sure you know the difference.
Basically, venture capitalists are the high rollers who want to make the million — even billion — dollar bets; angel investors typically make investment rounds of under a million dollars.
For most small business owners looking for capital investments, you’ll most likely be looking for angels.
Still, before you go any further, be sure you know what type of business you want to build.
“If you don’t raise capital, you can still build a lifestyle business and do work you love for a great paycheck. But when you raise money, you have to know what you’re getting in to because the whole dynamic changes.”
Steinberg has started six companies over the last 12 years and says it’s critical for business owners who take on investors to understand that what they’re giving up. “Everything changes — success becomes about acquisition.”
She adds that to deliver on the goals you’ve set forth, “you’ll probably have recruit new hires, so running your business becomes less about you delivering the product and more about you managing a team.”
Capital Catch-22: Profitability First
“The whole notion of raising money to get started is dead,” says Ash Kumra, a business coach, speaker and entrepreneur.
Kumra raised more than $500,000 for his businesses over an 18 month period from a combination of Small Business Administration loans, friends, family and angel investors.
The lagging economy has left most investors risk adverse; this presents a dilemma for small business owners: You have to demonstrate the significant traction and growth you’re able to facilitate with the money — without the money.
The solution? Good, old-fashioned bootstrapping.
“The metrics have to work and you have to be on the road to being profitable before you even approach an investor,” says Kumra.
He adds that “this is actually a good thing because it gives you the freedom to pivot until you find the right business model without any outside pressure.”
“Pivoting” is a term used in the capital community to describe the forward and backwards momentum every new business owner faces as they field test ideas to see what sticks.
Kumra says it’s perfectly normal for start-ups to pivot for up to 12 months so it’s best to bootstrap during this phase without being tied to a specific strategy pitched to investors.
“The more you can use the early stages to test market, attract customers, generate revenue and generally find ways to run the business well, the more leverage you’ll have later.”
Yep, It’s Still About Who You Know
Attending events, conferences, pitch contests and just about anything else to get in the room with potential angels is a big part of the process.
In other words, the amount of money you raise is directly proportional to the amount of hustle you demonstrate.
Hoeft, a student at the University of Wisconsin, raised $125,000 through a seed investment from Milwaukee-based 94 Labs.
“I found out about 94 Labs through the CEO Student Organization I’m part of. We hosted a Business-Model-Athon where students mapped out their technology ideas on a business model canvas and then pitched it to the group at the end of the day.
It was there that Hoeft pitched his idea and was then accepted to the incubator.
To find the right networking events to support your small business financing, pay close attention to your industry and start reaching out to key players.
Begin with social media first by commenting on Twitter posts. Eventually, you’ll have to move the relationship offline.
The key here is not to approach people for what they can do for you; think instead about what you can do for them.
How to Make the Pitch
Daily Worth founder Amanda Steinberg says she has pitched more than 200 investors. Of those, 25 have provided small business funding for her venture.
“You have to understand that you’re competing against computer science majors from Stanford, so you really have to know your metrics and have an unbelievably polished story to tell.”
In addition to being profitable already, as part of “polishing your story”, investors will also want to see these documents:
Nathan Lustig founded his first business in 2005, raising $150,000 from friends and family in just six weeks.
When that business was later acquired, Lustig used his successful track record to raise another $150,000 for his new company, Entrustet.
Lustig says having the right documents for the pitch is simply the price of admission but, at the end of the day, it all comes down to the entrepreneur.
“Most investors in this class are investing in you 90% and your idea 10%.”
Originally posted on The Monster Employer Resource Center
About the Author: Emily Bennington is coauthor of Effective Immediately: How to Fit In, Stand Out, and Move Up at Your First Real Job. She has been featured on CNN and ABC News, and she has been quoted in publications including the Wall Street Journal, New York Post, US News and World Report, and the Washington Post Express. She is a regular contributor to Monster.com as well as the college section of The Huffington Post.