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.

 Starting Your Company

 From 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:

• Founder funding

• Grants

• Loans

• Friends and family

 Let’s take each one and explain the purpose and implications.

 Founder Funding

 Sometimes the 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.

 Grants

 When market 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.

 Loans

 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.

 Friends and Family

 Quite frankly, 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 friends.

To accomplish 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.

 The advantages 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 friends.

 Summary

 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 company’s 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:

• Bootstrapping

• Strategic Partnerships

• Customer Partnerships

• Angel investors

 Let’s take each of these and explain the purpose and implications.

 Bootstrapping

 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 don’t 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 inventory.

 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.

 Strategic Partnerships

 Often your 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.

 Think through 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 financial returns.

 These companies 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.

 Customer Partnerships

 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 success.

 In these 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. 

 Angel Investors

 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 VC’s?

 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 VC’s 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.

 Summary

 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 your success.

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            Bob De Contreras                                                  
            Rich Kramarik