How to get funding for a new business

Many with a good business idea or concept believe that, if only they had the necessary funding, they could go into business and be successful. That’s only partially true. The other part is that if they really want to go into a business, they should write their idea (develop a business plan) and approach some investors. Almost a business corollary to that is that they probably should develop their business, products and operate on a small scale (in their garage) to prove their concept while approaching investors. The real question is, who to approach?

How to Get Funding for a New Business

Commercial Banks, Venture Capitalists or Angel Investors

Obviously, if one’s business model goes beyond a very basic level, outside funding must be sought. Normally, the entrepreneur’s personal resources will typically be invested immediately, but if the business requires a real injection of capital, then friends and family are next. In some situations, a person’s family or friends may not be the ideal source of capital. Therefore, the entrepreneur is forced to consider venture capital, commercial banks or so-called angel investors.

Unless your business is already established and the funding required is for a new but related business associated with the existing enterprise, commercial banks are typically not the easiest sources of funding to obtain. That leaves you with angel investors and the venture capital community. Angel investors may be successful entrepreneurs looking for interesting investments or perhaps they are connected with business associations that seek to help raise capital for new opportunities. In any event, try joining networking groups or associations where these types attend. The prospective entrepreneur should also look for small business grants and small business loans (through the SBA), as well.

Venture Capital Requirements

Venture capitalists are a breed apart. Typically, they are demanding in what they require from a start up management team or entrepreneur. They operate as an investment front end for a group of established investment funds, wealthy individuals or corporate entities. Their operating strategy is to fund several investments usually in a specialized area: IT, software, health care, etc., hoping for a winner or two out of their investment portfolio. When and if an investment does not pay off, the VCs typically will sell off and recoup what they can of their investment.

business plan

Venture capital firms are interested in the following characteristics in any investment they fund:

Minimal risk
Very high payoff
Financial commitment from the management team
Experienced management team
Breakthrough product line, technology or large emerging potential market
Control.

Like any investor, the venture capital community is risk averse, but is universally interested in very high returns. Typically, these conditions are fundamentally at odds with each other, nevertheless, venture capitalist prefers that situation. As a precondition to the foregoing, they also demand that whomever is seeking funding, has sunk his own funds into the venture. By this strategy they know that the security of their funds is increased, when the management team has more to lose than they do. Of course, a seasoned management team and products that have a large potential market will further enhance the possibility that the business is successfully funded.

A Priori: The Business Plan

Before a funding source or venture capital company is contacted, the business or management team must have a well documented business plan and strategy written and available for review. The plan must contain your financial plan, which will include an income statement, marketing plan and sales plan. With that completed, it will also have an executive summary. The executive summary is sent to a venture capitalist for an initial screening review. Typically, most venture capital groups receive dozens of similar proposals every day. That’s why it’s important to have made a personal contact via telephone, if not in person.

business plan

The follow up after the plan has been received is vital. If the representative from the venture capital company has not already reviewed the plan, a follow up call after a week or so will bring it, hopefully, to his top of mind awareness. If there is interest, normally, they’ll call back within a week or so of their review. If not, then at best, perhaps one more call is justified. If and when they do call you, they will have certain questions or issues that they might wish to have addressed prior to a personal meeting. You might wish to now send the entire plan.

If the interest is sustained, the venture group will probably request a meeting in their offices. This is where a good Power Point presentation is required that will cover the main points of the business plan. The meeting will have the initial VC contact and perhaps others with some expertise in the business area that the plan addresses.

This will be the commencement of the negotiation process. At this meeting, the prospective CEO and management team must be present. One word of caution, if the funds that the management team invested or will invest in the business are very minimal, expect that the venture capital group will have voting control over the company. If the funding that is sought is minimal, i.e., some bridge funding, then the management team may be able to exert a greater control on the business. Generally the company providing most of the funding will expect most of the control. While it’s a negotiation, it always follows the Golden Rule of finance, “He who has the gold, makes the rules.”

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