From funding for startups to an ongoing business, the principles of getting funded are the same; you must understand and explain how you monetize your dream. This article describes the basic options and steps to supporting your project and getting startup funding. Let’s begin by explaining what I mean by “monetize.” The business owner’s project needs to generate cash to become a viable business. Your ability to plan and execute your project will determine the funding source.
Create a business plan first.
The first step in how to get series A funding for a business; you must describe your dream. I mean your vision, define your mission, and set the basis for your business plan. For you to become successful, you will address all the funding sources. Let’s begin by defining the audience and describing the standard startup funding options – capital for businesses.
What are your startup funding options:
- Self-funding: Funding one’s own startup lets you leverage your financial resources to support your business. Self-funding comes from turning to family and friends for capital, using your savings accounts, or tapping into your 401K.
- Friends & Family: Typically, these investors are willing to invest between $10,000 and $150,000 of their finances because they trust and feel loyalty to the founders or are motivated by their startup idea. This type of early-stage financing is commonly referred to as a “friends and family” round.
- Angel Investors: Angel investors are wealthy private investors focused on financing small business ventures in exchange for equity. Unlike a venture capital firm that uses an investment fund, angels use their net worth and are an ideal source of seed funding.
- Grants.Gov.: A startup grant is how the government funds your ideas and projects to provide public services and stimulate the economy. A grant program supports critical recovery initiatives, innovative research, and many other programs listed in the Catalog of Federal Domestic Assistance (CFDA)
- Private grants: Have no public or government affiliation. The grantor can tailor the requirements specifically to whatever the private organization deems appropriate. Private donations come from social clubs such as Rotary, Lions, nonprofits, private companies, and businesses.
- Crowdfunding: It is a funding round method of collective financing commonly given online. In this case, the company receives small contributions thanks to friends, family, investors, and anyone who wants to invest money in exchange, most of the time, for rewards.
- Small Business Administration (SBA) – guaranteed loans: The SBA guarantees incentives to lenders, mostly regional banks, to work with local small businesses, but it can still be hard to qualify for SBA 7(a) loans. Lenders generally require a good personal credit score (690+), two or more years in business, and solid annual revenue for you to opt for a 7(a) loan. Typically, SBA provides +/- 75% of the funds.
- SBA investment programs: A Small Business Investment Company (SBIC) is a privately owned and managed investment fund licensed and regulated by SBA. An SBIC uses capital, plus funds borrowed with an SBA guarantee, to make equity and debt investments in qualifying small businesses.
- A venture capitalist (VC) investment provides young companies with capital in exchange for equity. New companies often turn to venture capitalists for series B funding to scale up and commercialize their products.
Preparing a business plan to present to investors.
Regardless of the audience, it would be best to prepare a business plan. There are many internet aids to structure and guide you through the process, but the bottom line is that the decision to invest is made on the project’s capacity to generate cash, positive cash flow, to be more specific. Therefore, a model, typically an excel model, is used to describe the return on your investment (ROI). The mode: requires the capital to be invested (CAPEX), the operating expense (OPEX), the sourcing of materials and services, and market & pricing forecasting. In my experience, price forecasting is the most sensitive and difficult to document. Therefore, use industry-reputable price sourcing. Your price assumption impacts your financial indicators.
The business plan should address all risks associated with the project. It is a general recommendation to prepare a private/public offering memorandum for all funding sources besides family and friends. What is an offering memorandum? It is a legal document issued to any financial institution or potential investor defining your business’s objective, risk, economic, and deal terms. Think of it as a thorough business plan used by third parties to perform due diligence on your dream.
What are the pitfalls? Are you pursuing startup funding for an innovative new idea? Did you file, or are you waiting to be granted a patent? Protect your dream; this is your first step toward monetization. Your history of failures and success defines your credibility. Your business credit score takes into account your business credit card history, debt payment history, and the length of time in business. When you have no past, a startup must purchase credibility. Therefore, due diligence by reputable third parties defines your project’s credibility. Choose credible advisers: legal counsel, CPA, and auditor.
Three years of audit financials and tax returns for ongoing business will suffice. Be prepared to answer the question of the personal guarantee. Be sure that your wife/life partner endorses your intent; both of you must sign many diverse binding documents making you liable in case of default. If you, as the founder, are not willing to provide personal guarantees, walk away. If you do not believe in your project, why should a third party, like a banker, believe and extend external funding?
Beginning funding sourcing.
The best entrepreneur projects are self-funded, best described as the thixotropic effect. Like ketchup, once investors’ cash begins to flow, it pours. The market can and will identify money-making machines, and such good projects always find sponsors and funding opportunities. The initial trust and first seed funding are the most difficult. That is why most projects are self-funded and sponsored by family and friends.
Most financial institutions will not take the execution risk. They will only fund a business loan with an already established cash flow, limiting business loans to the amount of your repayment capacity. Your project’s cover ratio measures your payment capacity. What is the cover ratio? It is the amount of free money available to pay the loan; financial institutions typically require an index equal to or greater than two times the amount of the amortization schedule. Please note that the bank is not in the real estate business; even if you have excellent guarantees, like your own house, they are in the cash business. Therefore, do not ask for more than your capacity to repay.
Finally, a few words about project financing: venture capital investors will condition their participation to the level of control you are willing to provide. Private VC requires total control, details reflected in the operating agreement. If you plan to become a listed company, the Security and Exchange Commission will regulate the rules, and pre-and post-listing, requisites. Small business owners may feel it is too early to consider going public, but most savvy investors will require you to outline an exit plan. Prepare for speaking to potential investors. When do I get my invested money back? Will you pay a dividend? How liquid will my investment be? These essential questions you must address, especially to family and friends looking to help out with startup funding.