Starting an enterprise involves quite a few dimensions and one of the most crucial is of funding. Raking the money in is easier said than done. Here are a few sweet and bitter facts about funding your dream start. Entrepreneurs need to be acquainted with the fact that they are gambling. They are betting their own money (and probably others money) on the venture’s triumph. Before they embark on the entrepreneurial journey, they need to recognize how much they are willing to put at risk.
Entrepreneurial expedition and financial risk go hand in hand. You will have to boldly tread the path you have never trodden on. You and your management team will have to quit your jobs to start the venture. Customers and distributors will have to take a risk when they buy from your untried firm. Suppliers will have to take a risk when they provide credit to your new venture. If you want others to risk their money, then you must be the first person to gamble up.
1. Entrepreneurs have to accept risks: Simply put, the first option is to liquidate savings. If you have got it, give it up. There’s no way an investor is going to put in tons of capital that’s totally at risk while all or part of your next egg sits sagely. Secondly, take out a home equity loan. Investors tend to prefer this one because they know that nothing makes an entrepreneur work harder or smarter than the prospect of the bank repossessing his/her home. Thirdly, get a bank loan. If you can actually get a bank to lend you money, you will be demonstrating the kind of spirit investors are looking for.
2. Seeking funding is gruesome and needs reliance: Of all the activities entrepreneurs hate the most, raising money and managing money are at the top of the I-can’t-stand-to-do list. The fun for entrepreneurs in thinking up ideas taking prudent risks, winning and losing, wooing customers, inspiring employees, creating, and innovating. Raising money also takes considerable resilience. You must have the ability to handle rejection, especially when it comes to getting a loan or attracting investors.
3. Seeking funding is hardly a one time affair: High-growth ventures have an unquenchable thirst for money. Each state of growth may require an additional infusion of capital. Expanding into new geographic markets, investing, upgrading computer and information systems and myriad other cash outlays place new demands on fund. Entrepreneurs must be willing to ante up for a highly competent person to oversee the firm’s accounting and financial dimensions of the firm. They must also be willing to pay for a good accounting system and to use the services of an accounting firm that has experience helping emerging ventures grow and attract funding. It is almost impossible to raise firms without good people, systems, information and good connections, relationships and advice.
4. Funding sources have their expectations: Each source of funding is unique with its own expectations as to the amount available, the length of time it will be available, the level of return expected as well as specific terms and conditions, entrepreneurs must identify the type and amount of funding needed at that stage of the venture’s evolution and seek the source of funding that fits the venture’s circumstances at that particular time. Fun ding sources are like ocean’s tides. You cannot change them or swim against them. You must study them, tailor your approach to them, and time your funding search so that your firm fits their criteria.
5. Truly patient money does not exist: Start-ups face the greatest challenge in raising funds. Entrepreneurs must be in a position to provide most of the start-up funding and must be willing to make certain sacrifices to attract long-term funding. Bankers and investors abhor uncertainty. If you are seeking funding for more than a year or two, then you need to provide them with a compelling reason to be at risk for an extended period of time. Timing also applies to the venture’s ability to fulfill the funding sources’ expectations.
6. There are ways to raise money: There are dozens of funding sources and entrepreneurs need to be aware of them. Some of the sources are straightforward, others are complicated. Some entrepreneurs may be able to tap their network of contacts for funding. Funding sources have their own vocabulary and customs. They use terms like prefunding valuation, IPO, bum rate etc.
The two steps involved in starting and growing a venture are: raising cash and conserving the cash. Stephen C. Harper lays down seven rules for conserving cash:
- You need to have your financial act together. If the overall business plan has addressed the crucial who, what and where questions, then the financial plan should project funding needs.
- Don’t spend it unless you have to. Subject every spending to a “Is it really necessary” test.
- If you do need that item/activity, make sure that you are procuring it at the lowest reasonable cost and on favorable terms.
- Lease rather than buy.
- If you can get it used, don’t waste valuable cash.
- If you have to buy it then finance it for the longest period at the lowest rate so that it places the least drain on your cash outlays.
- Lastly, establish your own set of rules and create your own techniques to conserve cash.
The rewards for embarking on an entrepreneurial journey and the likelihood of success should more than outweigh the risks associated with the journey. Know the difference between taking an acceptable risk and being reckless. Veteran entrepreneurs stress the need to start the search for funding well before you need it, to have back-up plans because life is full of surprises and to never assume the deal is done until the money is actually in your bank account.