Ingredients of the Entrepreneurial Ecosystem - Funding
Wednesday, March 25, 2015
Ah, the world of funding. Many entrepreneurs think they have a million dollar idea, and that investors will be knocking at their door with money to invest. Here's the reality (from my experience) when it comes to funding:Entrepreneurs are expected to have skin in the game. That "skin" includes money as well as a significant commitment of time and energy. When seeking funding, expect a lot of questions regarding your projected revenues and expenses over the next 3-5 year time frame. Acceptable uses of investment capital may include production/manufacturing, marketing and sales. It's highly unlikely that you will receive funding for paying yourself a wage. Funders, whether banks or equity investors, want to minimize their risk like any other investment opportunity. They will want to see that you have a compelling product or service, competitive edge, marketing plan, customer commitments, and a strong leadership team. There are many avenues for pursuing funding for your business:
- Your own $$$ - Your personal credit plays an important role in funding your business. If you have good credit, you will likely leverage it with traditional lending institutions to create lines of credit and/or personal loans to help launch your business. If you have poor personal credit, my advice is to focus on fixing it!!!
- Friends and Family - outside of your own investment or leveraging your personal credit for your business, your friends and family are a logical next step. This group will likely believe in you more than any other regarding your ability to execute and be successful with your business. They may structure their investment as either a loan or equity investment.
- Banks - focus on minimizing their risk of making a bad loan, so be prepared to sign personal guarantees if you have any valuable assets. Banks and traditional lenders do not like "blue sky" estimates of revenues, and will almost always want to see a history of revenue, current customer commitments and contracts.
- Community Loan Programs - there are generally many community organizations who provide counseling and make loans to small businesses. In Spokane, organizations like SNAP Financial Access, Northwest Business Development Association, Ignite Northwest, and others make loans available to entrepreneurs and small businesses. They each have their own lending criteria, but are an avenue to consider if you are looking for business loans.
- Crowd Funding - the newest trend in fundraising; over the internet. You have likely heard of Kickstarter and Indiegogo. There are over 600 crowdfunding platforms worldwide that enable entrepreneurs to create an online marketing campaign for seeking donations, usually in exchange for some reward. The goal is to raise significant donations to help launch your product. In November, equity crowdfunding was legalized in Washington state. This new legislation allows crowdfunders to receive equity for their investment rather than the traditional donation/reward system.
- Angel Investors - for investments of $200K-$500K, an angel investment may be worth exploring. This group of accredited investors (personal income of $200K/year or $1M in net worth) like to invest in opportunities that will result in a high return (10 times their investment in 5 years). Angel investment rounds typically follow a round of financing from friends and family for high growth startups. Angel investors like innovative products (preferably with patentable intellectual property), a scalable business model, potential for rapid growth, and look for a strong leadership team with a proven track record. They like to invest in businesses close to where they live, and don't be surprised if they require a position on the business' Board of Directors. The Spokane Angel Alliance is a very successful angel investment group. With over 115 members, the group has invested more than $6M in 20+ companies over the past three years. These companies have gone on to raise over $50M from others, and have created over 400 new jobs. The angel investment community plays an important role in funding high growth entrepreneurs across our region.
- Venture Capital - the next stage of fundraising for high growth businesses. Venture capital companies receive an equity stake in the business in exchange for their investment. They typically invest in novel technologies or business models. Only a very small percentage of startup businesses obtain venture capital funding.