My company began in January, 2005. We've spent $12,760 establishing ourselves, getting patents, and obtaining a business product portfolio plan. We need $1.7 million to move forward. We've tried to get investors, venture capitalists, grants, and even a business credit card. You hear about how much money is "out there" for entrepreneurs, but we can't seem to get straightforward answers about how to get it. Is there any advice you can offer?
—D.R., St. Louis, Mo.
Is there really money available "out there" for entrepreneurs? Well, yes and no. The answer really depends on which entrepreneurs are asking for the funds—and why.
"With an attractive idea, solid team, a complete business plan, and a clear plan for how you will make money, the possibilities for funding could be endless. You might even find yourself turning down investors," says Channing Chen, a venture consultant for the San Francisco Small Business Development Center. "Without any or all of those attributes, you could also find yourself knocking on a lot of doors to no avail."
It sounds as if you've got yourselves a legal structure and some proprietary intellectual property. You also mention a product portfolio plan, but not a complete business plan. If you don't have one, you definitely should put one together.
IDENTIFY MARKET."Your job, as the entrepreneur, is to put together a plan or 'story' that conveys how your business will make money and what [investors] can expect as a return. Plenty of entrepreneurs find themselves funding initial admin activities such as incorporation, filing for patents, and other legal or accounting-related activities when they have no idea what the market acceptance is for their product or service," Chen says.
Start by identifying your potential customers, quantifying their interest in your product, and figuring out how big your potential market is. How much will it cost you to acquire customers? You'll turn this data into projections for the financial component of your business plan. "These projections show how fast your business is expected to grow over the course of several years. From these projections, a valuation of the company can be derived in addition to the value of the investor's stake in the company,"Chen says.
Make sure you do a professional job on the entire plan, particularly the sales and marketing piece. "No matter how good your business plan is overall, the most important section of the plan is the sales and marketing," says Joe Knight, co-author of Financial Intelligence, A Manager's Guide to Knowing What the Numbers Really Mean. "You need to really analyze your market…and have a solid strategy for how you are going to sell into that market. Venture capitalists go straight to the sales and marketing plan and if that doesn't make sense to them, then the rest doesn't matter."
MULTIPLE SOURCES.Look online for scads of advice, templates, and professional help writing a business plan. A good place to start your search is with the U.S. Small Business Administration, www.sba.gov (click on "starting your business"). For resources in the St. Louis area, visit www.stlouisarchangels.com as well as the Missouri Small Business Development Centers.
Even with a sterling business plan, $1.7 million is a lot of money for a young company to be requesting. It's unlikely you'll find all that money from one source at one time (companies typically do several rounds of funding over several years), so continue investigating multiple options. But cross venture capitalists off your list for now. "VCs are looking for deals that are $4 to $5 million and up," Knight says. "Look at angel investors. These are investors who invest on their own or in consortiums."
Angels typically invest between $25,000 and $100,000 in exchange for some ownership interest in your firm. Search online for angel investor groups in your region (it sometimes helps to be local, though it's not mandatory) and look over their Web sites to determine what kinds of companies they're interested in and how to get your business plan in front of them for consideration.
VERY INTERESTING.Along with private investors, you should be considering personal savings, small business loans, and—possibly—business credit cards as pieces of the funding puzzle. "A business credit card is probably the easiest and fastest way to get business funding," says Justin McHenry, research director at IndexCreditCards, www.indexcreditcards.com, a credit card research site.
"Business credit cards offer sizable credit lines, potentially $50,000 or more, plus many will offer a 0% interest rate for the first year of purchases, giving entrepreneurs a little breathing room before payments are due and interest starts accruing," McHenry says.
There are, of course, downsides to using credit cards for your business startup. The most obvious is that credit cards carry higher interest rates than other types of loans. The second is that even if you have incorporated your company, almost all credit card companies will insist that you be personally responsible for the debt.
CIRCLE OF FRIENDS."If the business fails and the card is not paid off, it will go on [your] personal credit history and could haunt you long after the business is just a memory," McHenry notes. A list of small business credit cards offering the lowest rates to small business customers is available at McHenry's site.
Realistically, your best bet for initial capital is most likely going to be the people who know you and your business partners: friends, family, and acquaintances. "These are the people who know you best, trust your judgment, and can usually get you needed capital faster than outside or 'random' investors who may conduct lengthy due diligence," Chen says. Going with what—and who—you know is probably your best bet in the near term. Good luck!
Have a question about your business? Ask our small-business experts. Send us an e-mail at Smart Answers, or write to Smart Answers, BusinessWeek.com, 45th Floor, 1221 Avenue of the Americas, New York, N.Y. 10020. Please include your real name and phone number in case we need more information; only your initials and city will be printed. Because of the volume of mail, we won't be able to respond to all questions personally.