Have a great business idea? Where do you get the money to finance it?
You’ve stuck on an idea. One you are really passionate about. Something you believe you can accomplish and follow through on. One that could make a lot of money and solve a big problem. It might even keep you awake at night and make you want to just quit your job and go all in. That only leaves the big question of how you are going to finance it.
Running out of money is the most common reason that the vast majority of startup businesses fail. That’s even if you can afford to get it off the ground. So, where do you find the money? How do you get it?
Know Your Business Startup Costs
Miscalculating your business startup costs can be a fatal mistake. It will at least add a lot of stress and panic. That can happen if you raise too little or too much.
So, how much money do you need to get going? It may be a lot more or less than you think. Mark Zuckerberg started Facebook with just $1,000. Others have raised millions of dollars before starting.
Even a small local business is going to have some basic costs. This may include:
- Company incorporation
- Domain name registration
- Logo creation
- Website design and hosting
- Accounting help
- Legal help
- Registering patents and trademarks
- Business plan
- Salaries for cofounders and early team members
You may have startup specific costs including:
- Designing prototypes
- Focus groups and split testing
- Market research
- Acquiring data
- Building or coding the initial product
- Acquiring users
Some of these costs can be tiny. Or, they may take millions of dollars just to get a prototype, fund a team of engineers, and keep the company afloat until you close enterprise sales.
Know your cash flow needs. Often a startup’s best month for sales is also it’s toughest to financially survive. Your costs can skyrocket while you are waiting to get paid on that big wave of orders. You don’t want to go bankrupt the week before you would have really made it.
This doesn’t mean you have to find the funding for your company all at once. You don’t just get one big lump sum that will last forever. You take in a little at a time. Just enough to get you to the next milestone.
So, what’s your next goal or marker? What is it going to take to cover your costs for the next 6 to 12 months when you get there? Know these runways and burn rates.
Know Your Funding Options
There are many ways to fund your startup business idea. These really fall into one of two categories.
- Dilutive funding
- Non-Dilutive funding
Dilutive funding means you are diluting your ownership stake by giving up equity and shares in your company.
This means giving up a percentage of your profits and equity, voting rights, and what you can offer future investors or partners in exchange for funding in the future.
Non-dilutive funding is typically debt financing. You are committing to repay what you borrow. You have to repay, typically with interest, regardless of how your business performs and if money is coming in the door.
Other forms of non-dilutive funding can include grants and winning competitions.
There are many ways to get the money you need, and many sources, including:
- Angel investors
- Friends and family
- Venture capital funds
- Local and federal grant programs
- Startup accelerators and incubators
- Crowdfunding platforms
- Partners and cofounders
- Personal credit
- Small business loans and lines of credit
- Mortgage loans and equipment financing
What You Need to Raise Money
So, what do you need to have in order to get this funding for your business?
This largely depends on what type of financing you are seeking. In the early days, debt financing may substantially rely on your personal creditworthiness. Far more so than your business idea.
Raising early-stage startup capital from equity investors will rely a lot more on your experience and track record, as well as the presentation of your idea.
In both cases basic documentation required is likely to include:
- Articles of incorporation
- Tax ID number
- Business plan
- Marketing plan
- Executive summary
For equity fundraising, you are also going to need a pitch deck.
Factors involved in successfully raising equity capital will include:
- Tackling a big market
- Strong competitive advantage
- The best team
- The thick skin that can take a lot of rejection
- Willingness to listen and take advice
- A great story
Start Pitching: Where to Find Investors
The best types of investors will vary depending on what stage your business is at. In every case, you want to begin by reaching out to your personal contacts and network. Who do you know that would make a great investor? Who do you know that has the money to invest?
If you are coming up short, who do you know that knows these people and can introduce you? You may need to look up old college friends, go network in new places or speed things up with the help of a fundraising consultant.
Each round of investors you bring in should be introducing you to your next set of investors. Fundraising takes time and you can’t expect to announce you are raising today and put money in the bank tomorrow. It can take months to close a round. It can take months and years to build the necessary relationships in advance.
Alejandro Cremades is a serial entrepreneur and the author of The Art of Startup Fundraising. With a foreword by ‘Shark Tank‘ star Barbara Corcoran, and published by John Wiley & Sons, the book was named one of the best books for entrepreneurs. The book offers a step-by-step guide to today‘s way of raising money for entrepreneurs.
Most recently, Alejandro built and exited CoFoundersLab which is one of the largest communities of founders online.
Prior to CoFoundersLab, Alejandro worked as a lawyer at King & Spalding where he was involved in one of the biggest investment arbitration cases in history ($113 billion at stake).
Alejandro is an active speaker and has given guest lectures at the Wharton School of Business, Columbia Business School, and at NYU Stern School of Business.
Alejandro has been involved with the JOBS Act since inception and was invited to the White House and the US House of Representatives to provide his stands on the new regulatory changes concerning fundraising online.