One of the challenges inherent in starting a new business or opening a new company is that of financing. Because there are so many costs associated with entrepreneurship, most veteran business leaders say that it’s wise to have more money than you’ll need so you’re prepared for any and all needs, which can include — depending on the size and scale of your company — space rentals, employee salaries and benefits, equipment costs, marketing investments, licensing, and potentially many others.
While capitalization is a top concern for any new entrepreneur, Case Western Reserve University economics and entrepreneurial studies professor Scott Shane says, “Most entrepreneurs don’t need much capital to get started. He adds that “The most common source of that capital is the founder’s own savings, with the majority of businesses only obtaining money from this source. As a result, more people finance their start-ups with their own money than get money from banks and friends and family members combined.”
Still, there are lots of aspiring entrepreneurs who present their concepts and business plans to friends and family members, who often contribute investments with the hope of getting solid returns. It’s risky of course, but those with disposable income are often glad to support a new venture, even if it might take some time for the business to pay them back, then provide profit.
Other potential new company owners seek established funding sources. Vancouver executive Christopher Kape, an entrepreneur and venture capitalist who more than 20 years ago founded JAMCO Capital, an early-stage investment and strategic advisory firm, has helped numerous Canadian companies get started. His client list represents a number of industries including gaming, high-tech, food, and wellness.
Chris Kape notes that while friends and family members are easy to approach, he still cautions new business owners not to take too much money from them. In fact, he advises being clear about the risks involved in investing in startups.
According to Kape, more than 90% of startups fail. He says that on one hand, if you do take money from them, you will likely feel more responsible for it and therefore be more careful in your decision making. The other side of the coin, though, is that there could also be negative consequences, especially if things don’t go well.
Another popular option for financing a new business is through angel investors. These are individuals who invest their own money in companies at early startup stages in exchange for an equity ownership interest. In every large city, there are usually a few groups of angel investors who loosely operate through a network.
Is this option right for you?
“It’s my rule of thumb that it will always take longer to raise angel financing than you expect,” writes Richard Harroch, managing director and global head of M&A for Vantage Point Capital Partners in the San Francisco area, “and it will be more difficult than you had hoped. Not only do you have to find the right investors who are interested in your sector, but you have to go through meetings, due diligence, negotiations on terms, and more. Raising capital can be a very time-consuming process.”
If you decide to pursue this route, angels will want to know that you, the founder (or the group of founders) are concerned with quality and integrity, and are passionate and committed to the company.
Of course, you’ll need to present them with a comprehensive business plan that addresses growth potential as well as any early progress you’ve already made. It helps to have something proprietary, like new technology, for example. And you’ll want to own your intellectual property. You’ll also need to have appropriate valuation with reasonable terms.
If none of the above sources are right for financing your new venture, there’s always the tried-and-true bank financing, which, if you’re approved for a business loan, could be delivered with a hefty interest rate.
“Not all entrepreneurs are from a sound financial background,” writes Ajay Sharma, president of Abhinav Outsourcing Pvt. Ltd. “Most will need initial loans on reasonable interest rates in order to generate capital to start their venture or enterprise. It is self-explanatory but without funds, entrepreneurs cannot grow, and this is where banks, particularly commercial banks play a significant role in the lives of entrepreneurs.”
In other words, once the company is open for business, the owner will need to fund the cash cycle.