Alternative Funding Sources to Start or Grow your Business

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Phillip Moris Barber
8 years ago
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1 Alternative Funding Sources to Start or Grow your Business with guest speaker Cliff Ennico Are You a Small Business or an Entrepreneurial Venture? There s a BIG difference! If you are a small business : You are probably in a retail or service business; Your market is local/regional, as opposed to national/international; Your funding will come primarily from friends, family and local banks; and Your goal is to provide employment for yourself and family members. If you are an entrepreneurial venture : You are probably in a manufacturing or high-technology business; Your market is national/international, as opposed to local/regional; Your funding will come primarily from outside sources angels at first, then venture capitalists and other professional investors; and Your goal is to grow very fast and either (1) go public or (2) sell out to a publicly traded corporation within three to five years. It doesn t matter which you are, as long as you know it and act accordingly 1

family and local banks; and Your goal is to provide employment for yourself and family members.

2 When You re Getting Started There are two ways, and only two, to fund a startup business: The customers/clients put in $ in the form of revenue; The owners put in $ in the form of capital; If revenue is not enough to pay bills each month, the owners need to put in more capital to make up the difference. The longer it takes for the company to break even, the more the owners will have to go out of pocket to keep the business on life support sooner or later they will give up and cut their losses The sooner it takes for the company to break even, the easier it will be to find new owners to put in capital (a/k/a investors ) Hitting Up Your Friends and Family May be the only way to get capital for your startup business Don t treat them like friends and family get proper documentation just as you would from a total stranger. There are no gifts : it s either a loan or an equity investment If it is a gift, get something in writing so you are protected if your donor dies and you are dealing with their cold-hearted estate lawyer Friends and family may make demands on your business professional investors won t Gee, cousin Elmo is having trouble finding a job out of college. Can t you find a position in your company for him? 2

The longer it takes for the company to break even, the more the owners will have to go out of pocket to keep the business on life support sooner or later they will give up and cut their losses The

3 Pitching Investors: The Three Steps Step # 1: Find Them Step # 2: Prepare a Business Plan Step # 3: Surviving the Due Diligence Process Finding Individual Investors, a/k/a Angels Angel a wealthy individual who invests in an early stage company either (1) because they want a high return on their investment or (2) because they have a hidden agenda you have to find out about Places to look for angels : Boards of local nonprofit organizations Society pages of local newspapers Accountants or financial advisors who specialize in early-stage companies, such as (forget about lawyers) Venture capital organizations Angel clubs: Google [your state or county] angel investors 3

agenda you have to find out about Places to look for angels : Boards of local nonprofit organizations Society pages of local newspapers Accountants or financial advisors

4 What Investors Look For in a Business Plan Your executive summary: what you are all about The four C s : customers, competition, credibility, cash Your market: will people actually pay for the stuff you re selling? Your competition: do you have a compelling competitive advantage? Your management bios: do you have credibility? Your cash flow projections: Even in this tough economy, you can still find money to grow you business, BUT No investor in their right mind wants to pay your utility bills or other basic expenses; these must be covered by operating revenue Should you do it yourself, or get professional help? What Banks and Other Lenders Look For in a Business Plan Banks and other lenders care only about one thing: the loan to value ratio If you are borrowing $100 and put up collateral worth $200, that s okay If you are borrowing $200 and put up collateral worth only $100, that s NOT okay Consider having your local SCORE chapter help you put together your business plan: Many SCORE counselors are retired officers of local banks, so they not only know what banks look for, they may be able to help you with introductions as well Go to and type in your ZipCode to find a SCORE chapter near you 4

Your cash flow projections: Even in this tough economy, you can still find money to grow you business, BUT No investor in their right mind wants to pay your utility bills or other basic expenses;

5 Surviving Due Diligence Get a good lawyer, AND a good accountant (you need both) make sure they are reputable (i.e. the investors recognize the name) Always, always, always, get a nondisclosure/confidentiality agreement (NDA) before you open your books Be prepared investors HATE surprises! Structuring the Deal: Loans The benefits Lenders receive a fixed rate of interest, no matter how well/poorly the business is doing Lenders can t tell you how to run the business as long as they are being paid on time You can pay them off any time you like The disadvantages You have to pay lenders on time If you go belly up, lenders get paid in full before you and your partners get a dime The bottom line: individual investors should be lenders unless they will be long-term partners and are willing to roll up their sleeves and work in the business 5

being paid on time You can pay them off any time you like The disadvantages You have to pay lenders on time If you go belly up, lenders get paid in full before you and your partners get a dime The

6 Structuring the Deal: Equity Investments The benefits: They do not get paid on a fixed schedule, like lenders: you pay them only when you have sufficient profits to do so The disadvantages: They are your partners, they have legal rights, and they can tell you how to run your business The bottom line: the only people who should be equity investors are people who either (1) can help your business grow over the long term or (2) are willing to roll up their sleeves and work side by side with you every day. Structuring the Deal: Joint Ventures and Strategic Alliances A joint venture or strategic alliance is basically a partnership between your business and another company Generally (though not always), you and your joint venturer will form a separate corporation or LLC: Each company contributes something to the venture (e.g. you put in your technology, the other company puts in their cash and labor) The joint venture company is run by a board with representatives of both joint venturers Like a marriage, you should agree upfront who gets what assets in the event of divorce 6

grow over the long term or (2) are willing to roll up their sleeves and work side by side with you every day.

7 Some Key Points to Remember Avoid investors wherever possible Investors can be pains in the A.. You have to share everything with them. If things don t work out, you gotta buy them out! If you must have outside capital, don t look for investors, look for partners instead! When selling investors, focus on what is happening, not what will happen Choose debt over equity whenever possible When I was one and twenty, I heard a wise man say, give pennies and diamonds and rubies, but give not your Stock away! (apologies to Alfred Edward Housman) Suggestions for Further Reading MoneyHunt: 27 New Rules for Creating and Building a Breakaway Business by Miles Spencer and Cliff Ennico (HarperCollins 2000, available at Finding an Angel Investor in a Day, by Joseph R. Bell (The Planning Shop, 2007) Entrepreneurial Finance, by Philip J. Adelman (Prentice-Hall, 2003) 7

When selling investors, focus on what is happening, not what will happen Choose debt over equity whenever possible When I was one and twenty, I heard a wise man say, give pennies and diamonds and

8 Thank You! Cliff Ennico phone: (203) web: Additional NFIB.com Resources 4 Alternative Sources of Financing How to Ask Family and Friends to Invest Microloans 101: What They Are and How to Get One for Your Small Business How To Fund Your Small Business With Venture Capital 8

cmsid=50479 How to Ask Family and Friends to Invest http://www.nfib.com/business-resources/business-resources-item?

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