Sources of Money

Many of my SCORE clients ask me how to raise money. More specifically, they ask where can I get the money I need to start my business? As with most things, raising money depends a lot on the nature of your business and how much money you need. Before you even think about raising money, you need to figure out the business you want to start. Check out Three Not So Easy Pieces for the three essential documents you need to create.

How Much Do You Need?

The most important question you need to ask yourself is how much money do I need? Simple, right? It seems like a simple question but it will take some real effort to figure it out. The best place to start is to do a Financial Model. This is the best way to get all of your assumptions down. Thinking through and capturing your funding assumptions is your first step.

Once the financial model is done, you then need to figure out what that money buys you or what milestones will you complete with the money? All investors will want to know this. These Milestones need to be measurable points that are “bright line” type of events (e.g. you know when you are past them). Examples include: Completing a prototype, commercial product completed, first revenue or becoming profitable. A more detailed discussion of Milestones is a whole separate post (It’s on the list).

Where Do I Go?

That all depends on the type of business you have and how much you need? The average small business takes about $10,000 in capital to start (see story here). If you look at the list below, it’s segmented by the typical number of people and the capital required. The funding methods are in no particular order. These numbers are only the initial investments. Follow on investments are dependent on what milestones are achieved.

Type Of Business

• Compact Business (1-2 people, $1-$10k): Designer, Architect, IT Consultant, Craft Making, Handyman, etc.

These businesses are usually started by either someone who wants to branch out on their own or a couple of co-workers who want to exist the corporate grind. The startup costs are low since you either work out of the house or have a small office. The biggest expense will be the salary burn rate before you get your first clients and any office equipment or software or maybe a vehicle.

Usual Funding Methods: Personal Savings, Friends and Family, Credit Cards (scary but true) and/or Home Equity Line

• Small “Contractor” Business (2-10 people, $10k-$50k): Construction (General Contractor, etc.), Consultant

The biggest expenses are equipment and for construction specifically, trucks. Usually, you need a reserve of cash for materials, sub-contractors, etc.

Usual Funding Methods: Personal Savings, Friends and Family, Credit Cards and/or Home Equity Line

• Small “Brick and Mortar” Business (2-10 people, $50k-$100k): Restaurant, Bar, Cafe, Retail or Light Manufacturing

The biggest expense may be equipment or construction costs to get up and running. You many need some employees since doing it all yourself would be close to impossible.

Usual Funding Methods: Personal Savings, Friends and Family, SBA loan, Microfinance, Home Equity Line and/or Silent Partner

• Small Non-Profit (2-10 people, $0-$10k): Neighborhood Association, Educational Program or Outreach

Not a lot of capital involved. Usually no permanent space required. Targeted activities that benefit specific sets of people are usually the biggest expense.

Usual Funding Methods: Donations (Private and Corporate), Memberships, Fundraisers, and/or Grants

• Medium “Brick and Mortar” Business (10-25 people, $100k-$1M): Build Out Retail, Manufacturing, Build Out Restaurant, Consulting Firm

Involves significant construction costs or capital equipment to start. A reserve for staff salaries is also required

Usual Funding Methods: Bank Loan, Construction Loan, Lease Line (for equipment), Silent Partner and/or Personal Savings

• Web Software Startup (5-10 people, $100k-$700k)

The biggest expense is salaries, which can sometimes be reduce if you give employees more stock. Once you get to your initial release, then you either have revenue or you can go after a bigger round.

Usual Funding Methods: Personal Savings, Moonlighting, Angels, Friends and Family and/or Strategic Partner

• Hardware Startup (5-10 people, $100k-$1M): Board Level, Embedded Product, etc.

Salary expenses are a big component along with building hardware. Software tools usually have to be purchased along with test/lab equipment

Usual Funding Methods: Angels, Venture Capital, Strategic Partners, Rich Friends

• Semiconductor Startup(5-12 people, $2M-$5M): Any Kind of ASIC (Application Specific Integrated Circuit)

Just like all high tech startups, salary is a big expense. CAD tools and Silicon runs also add up.

Usual Funding Methods: Venture Capital, Strategic Partners, Angels

• Biotech Startup (5-15 people, $5M-$20M): Medical Device, New Drugs (pre-clinical)

Salaries (no surprise) are a major component. Equipment/Labs/Facility are also huge expenses. For drugs, outsourced pre-clinical work adds up.

Usual Funding Methods: Venture Capital, Strategic Partners, Angels

What Materials Do I Need?

By now you have probably figured out that there are lots of places to look for money. Each type of place has its own unique set of material requirements. Some are real loosey goosey while others want your first born. In general, it’s best to always have an Executive Summary, Pitch and Financial Model ready to go. These three documents will at least start the conversation. The guidelines below are a pretty good start since there are no hard fast rules.

Funding Sources

• Friends and Family: Typically, they just want to know that you are really going to do something. Some need an executive summary while others need a full up plan. Usually, they just write a check.
• Bank: Will want a full up business plan as well as other forms filled out.
• Grant: Each one is different but basically the same as a business plan.
• Angels: Usually want an executive summary, then the pitch. Some will want to look at your financial model while others will want to see your business plan.
• Strategic Partners: Executive summary and maybe a pitch. They know the market/business well enough to not care as much about business plans.
• Venture Capital: Executive summary, pitch and financial model. Specific market roll out plans and maybe a technology whitepaper. It will be rare to find one that will want to see a business plan (see reference article below).

How Do I Approach Funding Sources?

Generally, it’s best to get introduced. As you can image, people with money are popular. They get asked to invest in lots of ventures. Standing out among the thousands of other potential investments requires an introduction. This introduction should be from someone that the investor trusts. There are referral services that say they can introduce you for a fee. It’s usually not a good idea to pay someone to introduce you to investors. That typically means that the introducing party only has an interest in you paying them not you getting funding. The only exception to this would be an Angel Forum or conference, where the fee is to cover the conference.

References

New York Times Article on Why Business Plans Are Not Read

Post over at Quicksprout on How To Raise Venture Capital

A great link to who got what type of VC money.

Another link to figure out how to distribute equity.

Both Sides of the Table has an excellent reference page on how to pitch a VC.