An inside look at the top methods to raise funds.
Let’s face it — starting a business is hard work. You not only need to spend countless hours doing research, attracting prospective customers and developing a plan to launch your million-dollar idea… you also need to figure out how to pay for it.
While this may seem like a daunting prospect, just remember that most businesses go through a “bootstrapping” phase where funds are low. During this time, the focus is to generate enough income so you can still survive while learning to make your business more profitable and attracting investor interest.
Don’t skip this first step
There’s no such thing as being over-prepared when it comes to growing your business, so take the time to do as much research as you can before reaching out to potential investors.
Prepare details on your monthly and annual operating costs (your “burn rate”), production timelines, customer segmentations and competitor analysis. Be ready to present your case to potential investors and answer all questions about your business.
Some key resources to help you get prepared:
● Online: Read articles about raising capital and growing your business in a healthy, sustainable way.
● Ask for advice: Don’t be afraid to ask your colleagues, peers and your mentor (if you have one) for advice on how to sustainably grow your business.
● Research government incentives: Depending on the kind of business you’re in, there are often a variety of government tax programs, grants, loans and other incentives available to help you succeed.
● Speak to your bank: Get your financial ducks in a row. Make an appointment to speak to your bank about how to manage your business.
What are my funding options?
Now it’s time to start looking at the various methods of raising capital for your small business.
“Love money” is a loan provided by a friend, family member, spouse or other personal connection. Usually, these funds are lent out informally and are not expected to be repaid until the business secures larger-scale funding.
Incubators & Government Funding
Many business incubators or “accelerators” will offer fledgling companies certain incentives such as shared office space, administrative access, board rooms and loans to help businesses get off the ground. Generally, a business will work with an incubator in the first few years of business, but they are expected to leave once they move into the production phase.
Additionally, there are a variety of government loans and grants available to help businesses keep the lights on before they begin seeking investor interest. A comprehensive list of services can be found at Canada Business.
Angel investors are wealthy individuals who wish to invest in small companies owned by other people. In most cases, an angel investor has already succeeded in their field and is looking to help finance businesses in the early stages of their development.
According to the Business Development Bank of Canada (BDC), “angels tend to fund the initial stages of the business with investments in the order of $25,000 to $100,000” compared to VC funders who typically invest $1,000,000 or more.
Entrepreneur and Forbes contributor Brent Gleeson suggests that building a trusting relationship with an angel investor is the key to success. He stresses that you must “know your business plan, be transparent, back up your valuation with real projections…and build a relationship based on trust.”
One great resource for finding angel investment in Canada is the Canadian Investment Network, which is free to join and can help you connect with interested angel investors.
Venture Capital Financing
Venture capital financing, or VC funding, is available for businesses with a high growth potential and tends to be more common in areas like communication sectors, biotechnology and information technology (IT). Venture capitalists will take equity in your business in exchange for funding, which means when you seek out VC funding you will be giving up a portion of the ownership of your company to that investor.
VC investors will expect a quick and significant return on their investment and are often the first group involved with a business that push to offer an initial public offering (IPO) on the stock market.
The professional expertise you shouldn't overlook
When you launch into an agreement with anyone — an incubator, a loan from a friend, VC investors or whatever the case may be — always have a lawyer review any contracts or binding documents before you sign them.
Richard Harroch, Managing Director and Global Head of M&A for VantagePoint Capital Partners, states in Forbes magazine that “rather than spending the money necessary to hire competent legal counsel, founders will often hire lawyers who are friends, relatives or others who offer steep fee discounts. In doing so, the founders deny themselves the advice of experienced legal counsel who can help the founders avoid many legal problems.”
So it may seem like a hassle and yet another expense, but remember that this is your livelihood. It’s important to seek expert legal advice before you sign to make sure everything is in your best interest.