Hands down, one of the topics most discussed by business owners has to do with how to fund your business. How much capital do you need? When is the best time to raise capital? How much runway do you have? What is your burn rate? How long before you run out of cash? What is plan B?
Although the early stages of your business life cycle may be full of F-words… (fun, frantic, freedom, fear) here are a couple you might want to consider as the first ones to seek out when it’s time to go to market.
Funds – As in Funds Available
Money saved up. As in how much money have you managed to save in anticipation of starting up. Some people decide to keep a full time job (working for someone else during the day and then burning the midnight oil on your side project) until it develops enough cash flow for you to be able to quit the day job. There’s some truth to the fact that it is easier to start a business earlier in life as your responsibilities and overhead may increase the older you get (kids get more expensive the bigger they get).
Family – (sometimes interchangeable with Fools)
This is a tough one – the people that love you and are willing to help you, regardless of how sound your business plan may be or not. There are many stories of parents and grandparents raiding retirement and equity to fund their kids plan. The most difficult thing here is to keep everything in perspective. What if things don’t go well? What if you can’t pay them back? Makes for an awkward Thanksgiving dinner…
One of the best pieces of advice I ever heard was from an attorney involved in the startup scene. He said that even with family, it is best to create a contract detailing the what-if’s and if-then’s. How much will be used, on what, and how it will be paid back. And what if it isn’t. In case of a total loss even a tax benefit could help lessen the sting.
These are a little further removed from family so the thought is that they are a little more objective in their reasoning. Most friends, when asked, will provide feedback on your business plan and will try to be objective but remain nice and positive. But a good friendship can be quickly destroyed when money and lack of payback occurs. Again, the advice to document the ‘relationship’ is good to follow.
This is the route I most commonly suggest business owners and startups to pursue. I view fans as those people that find your service or product – your business – as something they like and are willing to pay for. There is no investment contract. They pay to get what you have. It does not leverage you up. There is no interest, no payback, no dilution in ownership. You aim to overpromise AND to overdeliver. And you are solving some pain or problem they have. There is absolute truth in the idea that the best business is repeat business and your best marketing comes from word of mouth.
Many ‘treps have used crowdfunding platforms such as Indiegogo and Kickstarter to prefund their products, thus generating their own working capital for the production of their goods. The great thing about these platforms is that they generate extremely important feedback from the consumer audience, the ultimate voice asking for your product or ignoring it completely.
Once you have fans buying what you have to offer, you get traction. Get enough traction, and you have a viable business. And with a viable business, it is much easier to go to market to raise capital, if you even need it at that point…
Ricardo Small is the Senior Vice President with Comerica Bank’s Middle Market Group. With roots in entrepreneurship, capital access, and M&A advisory he has extensive knowledge on what it takes to establish and grow a business.