You don’t want to give away any more equity than needed when starting and growing your new business. In fact, wouldn’t you love to avoid giving away any equity at all? If you own 100% of the business you not only get to enjoy all of the financial benefits, but you also get to retain total control. You can run your business how you want and not how your board or investors or some VC wants you to run it. Want to be generous with your staff benefits, create a comfortable family-friendly work schedule, or maybe dedicate a portion of the venture to helping address social issues? If you own 100% of the business – then go for it!
Starting a business, and then growing it, does often take some money though. Here are three great options to consider before taking on investors and trading equity in your business for capital.
I’m a HUGE fan of bootstrapping. Even for startups that ultimately do want/need to take on outside equity investments – I encourage them to bootstrap as long as possible. What does that mean? It just means doing it all on your own with no outside capital at all. But then where does the money come from?
Your personal savings: I wouldn’t even think about starting a new business without a decent-sized emergency fund, but in addition to that you can be purposeful in your savings and set a goal to accumulate whatever target amount you need to get the venture going.
If you are thinking “no way I could save that much”, well my response to you is Yes, you can. It all comes down to priorities. I’ve yet to meet with anyone who really didn’t have any margin in their personal expenses. Maybe they’re spending all that margin on eating out, or new iPhones every year, or some other perfectly reasonable expense. But if they really wanted to, they could free up some cash flow and build a nice starter fund savings.
Cash flow from the venture: This is a great way to start a business. It’s not only possible, but it’s tremendously valuable to build this into your plan. What do I mean? Well, start small (a few products, a few services, a few customers, etc.) and make sure that your model is profitable. I can’t believe how many founders don’t get this. If you can’t sell your <whatever> for enough money to cover costs plus give you reasonable margin and cash-flow, why bother? In that case it sounds like you have issues with your cost model, or your product, or your target market – something is wrong.
If you sell your first few solutions for a cash-positive profit, reinvest every penny right back into the business. Control your costs and don’t take out any funds for personal reasons – use the incoming money to make even more money. The first 5 <whatever> can likely fund the next 10 <whatever> which can likely fund the next 20 <whatever>.
2. Get a loan – not necessarily from a bank
If you are impatient (consider reading the Tortoise and the Hare) and don’t want to take the time required to save or the slower ramp-up with cash-flow self-funding, getting a loan is always an option.
Sometimes a bank will lend some money to you, and sometimes they won’t. If you have a long personal banking history with a specific bank, you probably have a good chance of getting a loan or line of credit from them.
You can also look into loans from the Small Business Administration. They are specifically targeted for small business and startups, and often have lower rates than you can get elsewhere.
Peer lending options approve almost everyone. Peer lending platforms like Prosper and LendingClub will approve almost anyone for a loan. You might not love the rate if your credit is horrible, but you’ll likely get approved.
By the way, whether you get a great rate or not, from any lending source, I’d recommend paying off the loan as quickly as possible. It’s way better to have a cash-in-the-bank emergency fund versus a pile of debt hanging over the business (and you personally). “Things” will most certainly happen and you don’t want to be highly leveraged when they do.
Online platforms like Kickstarter – and many others – provide a way to “pre-sell” your solution to your target market. This is great not only for raising some money in advance, but it also helps validate your idea. If you can’t get people interested in the solution up-front, how strong is your confidence that you can get them interested later, after you’ve spent a ton of time and money on it?
While crowdsourcing is a good option to consider (in some, but not all cases) you still need to consider the comments in point number one at the top of this article. Running a campaign as a loss-leader would create a horrible disaster. You don’t want this to cost you more than you get… remember the whole point is to raise some money to start or grow your venture. Make sure you have all of your costs accounted for and covered, plus a healthy margin, built-in to the price of the solution.
Between one or more (yes, you can combine these ideas) of the above you should be able to get your idea launched. Hopefully your solution is profitable enough that once you launch you can self-fund into consistent growth and tremendous success!
Go conquer your market now! :)
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