By Karen E. Klein
Q: I am a small-business owner and have been searching for an investor or another way to obtain financing. I've been unable to obtain money from family or friends, I can't get conventional financing, and the SBA says I don't qualify. Where do I go from here? Our business has very good potential, but we are not going to succeed without funds.
---- S.H., Phoenix
A: This question -- or some variation on it -- is the top query in the Smart Answers mailbag. Often, desperate readers ask where to apply for the "free government grants" pitched on late-night infomercials and dubious Web sites. As this column has stated in the past, there's no free lunch: The government does not hand out no-strings-attached cash to would-be entrepreneurs. So where does an aspiring entrepreneur or struggling small-business owner find the capital to fund a good idea or expand a mom-and-pop operation? We posed the question to several small-business experts. Their advice is the subject of both today's and Thursday's columns.
The good news first: Investors are out there -- ready and willing to put cash into new ideas, experts say. According to a recently released study conducted by Babson College in Wellesley, Mass., and the Kauffman Center for Entrepreneurial Leadership in Kansas City, Mo., 1 in every 15 adults invested in startups last year.
"It's not that there's not money out there, it's just that the money doesn't meet up with the ideas," says Bill Gartner, a professor of entrepreneurship at the University of Southern California's Marshall School of Business. "Capital is not the real problem -- it's 'social capital formation' that hangs up most entrepreneurs: They don't know the right people, they don't understand the industry well enough. That's what they really need to concentrate on."
Most likely, the people who have the money, and the interest, to help an entrepreneur are outside his or her established network of friends, family, and business contacts, Gartner says, so a capital-seeking entrepreneur needs to network outside that comfort zone.
How to get started? Gartner recommends the "five strangers" exercise: Talk to someone you don't know about your business every day for five days and see where that gets you. "Use trade directories, go to industry trade shows, ask your contacts to introduce you, ask anyone you know for help," he says. Potential investors can include wealthy individuals, other business people willing to make strategic alliances, financial institutions, venture-capital firms, stock brokerage houses, and others.
When you talk to these people, don't give away your idea, but be able to give some sense of what it is, and why you think it will be successful, Gartner says. If the first five strangers aren't much help, don't give up. "It's a numbers game -- call anyone you can think of, you don't have much to lose," he adds. "Sometimes they'll talk, other times they'll be grouchy and they won't talk. Don't take it personally -- move on. There are other individuals who will talk to you, and who may be able to help -- keep trying!"
As you do your networking, remember to trust your intuition. If a stranger doesn't seem trustworthy, be circumspect about what you reveal. If you're not sure, display due diligence: Find out what this person's reputation is, what other deals he or she has been involved in, and how they turned out.
Before seeking capital, make sure your own finances are in order. If you don't qualify for a bank loan and can't get friends or family to invest, could it be that you're hampered by your own bad credit and inability to save money? A would-be investor is going to investigate your finances thoroughly, and a poor track record in your personal life is not going to engender much confidence in your ability to run a profitable business.
"Bankers and investors are looking for someone they consider a good business risk, and someone they see as a good money manager, with good character," Gartner says. If you've had money troubles in the past, it may be best to step back from the brink of entrepreneurship and take some time to straighten out your finances. Getting a job in the industry you're interested in will help your research and allow you to save money for launching your startup.
On the downside, experts say, if you've talked to many potential investors and consistently been turned down, it may be that your idea simply doesn't work or that the timing isn't right. Step back and reevaluate, or have an honest third party take a look. Can you make a compelling, realistic case? If you're already in business, can you show how successful it has been and how successful it's likely to be? Tom Stewart-Gordon, editor of the entrepreneurial SCOR-Report, based in Dallas, says that if friends and family have kept their checkbooks in their pockets, your idea may be flawed. If it's not a bad idea, says Stewart-Gordon, "then it is poorly presented, and potential investors don't understand how it will make money."
So if the reaction is less than you would like, think about modifying your plan or simply backing off for a while. Even the best idea in the world won't fly if the market isn't ready for it.
NEXT COLUMN: How to approach investors and learn about alternative sources of financing.
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