Sooner or later, anyone growing a business will need or want to raise money to finance further development.  This can be maker/breaker for any enterprise or project.   Timing is one of the keys — not waiting too long or attempting to raise outside capital too soon — as are securing the right amounts and forms of capital from the right sources.  Here is a quick synopsis of proven strategies and structures, starting with the earliest stage, seed funding and ending with the later-stage pathways.  Some of the pitfalls — things that can go wrong … the so-called “cautionary tales” — are included to help guide wise decision making.

  1. Your own savings — leave any long-term retirement money where it is, but consider using personal savings.  It shows your commitment … a willingness to have some “skin in the game,” which helps send the right message about the founder’s confidence, beliefs, and paves the way toward meaningful risk sharing.
    To avoid self-inflicted wounds:  Some skin is good, just be sure not to invest your whole hide!  Test your way in using Lean Startup strategies.
    The worst reason to go “all in” (use up remaining savings) would be if you are already roughly halfway in, and the cost of withdrawal (or a serious pivot) seems too hard to stomach.  Don’t let yourself get caught in fallacies of judgement, blind to fundamental assumptions about risk, convincing yourself there’s a viable business case without rigorous analysis and strong outside validation.  That said, check out Overcoming Barriers to Innovation and … keep going.  The world needs your innovation now more than ever!
  2. Obtain a seed-stage grant —  although a low-probability of success, grants can be leveraged or a variety of ventures that deliver “breakthrough” social and/or environmental impacts.  They take significant effort and developing a winning proposal is no small feat.  That said, sometimes, if no better option exists, and you can patiently pursue such “technical assistance” (TA is grant-speak for labor costs), it can result in a package of well-vetted and investible materials for subsequent fundraising.  This is either a perfect strategy or a colossal waste of time, depending on your circumstances.   Grantors include philanthropic Family Office foundations, multilateral finance institutions (such as World Bank or regional development banks), or various government agencies.
    Do not confuse this approach with a loan guarantee — loan guarantees or bank guarantees are not actually capital, grants or otherwise.  They ensure, via a legal backstop, the capital invested by others.  They often come in handy later as part of de-risking.
  3. Use Crowdfunding — a lot of hype and interest surrounds the various forms of crowdfunding, which applies to some industries and not as much to others, from the E-commerce “bridge” of Kickstarter and Indiegogo, showing that a project can gain some support, or a product can be pre-sold to an available market, to the small business investment sites that offer equity and loan options.  This is worth evaluating and decided if it provides a better option than more traditional pathways, but beware of the tendency to see it as a way of compensating for inadequacies or other issues in your investment pitch.  More at Crowdfunding Success Rates by Industry or our article on Equity Crowdfunding Tips, Rules and Issues.
  4. Family & Friends — the most common supplement to an entrepreneur’s own resources.  That wealthy aunt or uncle.  The former partner that you helped make wealthy in 19xx.  Your family and close network of friends can be a great source of capital when you are getting started, and your venture is still in the idea or early stages, which usually means hardly any else would take on the risk and uncertainty.  Also recruiting new founders this way becomes more of an investment in you and your idea, less in a company.  Family & Friends, and sometimes also Founders (thus termed FF&F) usually offer the most lenient terms.
    Common mistake:  Failing to ask “What could possibly go wrong?” Approach FF&F without looking carefully at that — coming to grips with possible downsides without an eyes-open, sober assessment, and you increase the odds that you’ll wind up upside-down.   Solution is to explain that there are risks, perhaps even attempt to “unsell” the idea of an investment in your venture, before you accept the check.  Be more formal and professional to compensate for the “friendly” environment.  Any relationship built on trust and love should be preserved no matter what happens in business.
  5. Get a loan — leveraging a good FICO credit score to arrange some debt has many advantages and few drawbacks if used wisely. Borrowing can be secured (such as by pledging something of value as collateral) or unsecured (such as a credit card or other lines of “signature” credit).  Skillful and responsible use of debt finance preserves equity (ownership) and control (voting rights) to help accelerate achieving your mission, investing in your venture, helping manifest your vision.  It is not for everyone or even every situation, but should be part of your evaluation.
    How is your credit rating? Know your credit scores (monitoring services that don’t lower your score when obtaining it — called a “soft” pull of your credit scores — are cheap or free nowadays), to wisely build borrowing capacity, both personally and for your business.  For the later, get a D&B DUNS number and protect it like any business asset.  Types:

      1. Secured debt such as equity home lines of credit (HELOC) allow you to use some of the value in your home.  They can be quite cost effective because the interest rates are on par with mortgages, still quite low for most borrowers.
        Word of caution:  do not gamble with your family home unless your advisor says you can afford to lose some or all of it.   Again, test your way in using lean strategies.
      2. Credit Card lines provide a fast and easy way to get access to cash, but typically are only for relatively short-term purposes (less than 12-18 months), and can become expensive after that.
      3. Government-backed Lending Program – see #8, below.

     

    What not to do:  Extend, but don’t overextend.  Having access to and using credit wisely is healthy, and smart business, but how much is enough?  Like alcohol consumption, a little (1 glass of beer or wine per day, studies show) is good and healthy, a lot … isn’t. Affordable debt — often zero APR (no interest) for a period of time — is abundantly available to responsible borrowers from banks and credit unions to help stimulate the private-sector economy.  Use it to invest in revenue-producing activities.  If you can’t predict a pathway to cash flow, use lean strategies to test and verify, and still be extremely careful.  Frankly, using credit responsibly requires emotional restraint and self-accountability (as if someone else is watching); accordingly, some people really should not have credit cards at all.

  6. Angel Investors — Angel capital fills the gap between start-up financing from “FF&F” — founders, family and friends — and venture capital or project finance.  Angel investors are usually fairly risk averse, but willing to take some risks with management teams and business plans they can relate to.  They’re not as particular as banks or VCs, usually.   An angel investor agrees to provide capital for a business or project in exchange for debt or equity ownership (shares of private stock).  The most common and useful structure for early stage projects or ventures is called a Convertible Debenture or Convertible Note.  This is sometimes synonymous with a Bridge Loan — it “bridges” to a subsequent round of investment at a higher valuation (share price).  Angel-funded ventures tend to have a higher success rate than any other type of startup capital, and typically come in with smaller amounts of capital than VCs.
    What not to do:  Long list of potential pitfalls, actually.  If your investment has social and/or environmental benefits, do not put those ahead of financial fundamentals, unless you know the angel is among the few that believes money is less important that impacts.  In that case, bring measurable impacts, such as carbon capture, or job creation, and emphasize those results as the real goal.  Be sure to focus on WIIFM — “what’s in it for me” [well, them], that is their potential for return on investment, either as dividends (profit sharing or “distributions” in an LLC), increasing the enterprise value (and thus share price) over time, or potential for a profitable exit.  See Learning to Avoid the Pitfalls: Seven Common Fundraising Mistakes for more on this.
  7. Impact Investors — a growing asset class that invests for the triple bottom line. For more about this see Impact Investing overview.  Impact investors now cover the entire spectrum from seed-stage grants  to first outside round of capital (often called “Series A” — when using preferred shares of stock), project finance and later-stage expansion capital.  They tend to be highly specialized by industry, country, and cause or type of impacts they want to obtain, such as helping small farmers through microfinance, climate change mitigation, or poverty alleviation.  For more about this exciting set of new avenues to true Affinity Capital (check out Raising Affinity Capital, a recorded webinar by In3’s Daniel Robin), visit the Global Impact Investment Network (GIIN), or contact us with your project’s current situation and readiness score (RAIN).
  8. Government-Backed Lending Program
    • Within the US, the Small Business Administration (SBA) offers loan guarantees, as does the US Depts of Energy, Agriculture, and others.  A loan guarantee is not a loan — it “stands for” (securitizes) private debt, enabling more banks and other sources to feel comfortable lending to companies with minimal operating history.  The SBA, for example, will guarantee 75% of individual loans from private sources, up to $750,000.
    • Outside the US companies, for US citizen-owned companies or US-involved projects working overseas, the Overseas Private Investment Corp (OPIC.gov) does provide direct loans into qualified countries.  Note:  In3 is certified by Moody’s Analytics as designated loan originators and political risk insurance providers for OPIC.  For non-US-citizens or when a project or venture does not have US involvement, see the next option.
  9. Development Finance Institutions — We work with regional Development Banks and Multilateral Finance Institutions (MFIs), each of which has programs for startups and “greenfield” project finance that deliver social and environmental benefits.  The upside is that such institutions are reliable and affordable sources of capital when qualified; they also tend to be very careful and slow.  See the next option for faster results
  10. Commercial Banks — commercial bank loans are generally the first option entrepreneurs consider because banks don’t take an equity stake or control in exchange for cash.  Banks ordinarily only make loans to companies with long operating histories and strong balance sheets.
  11. Alternative (Non-Traditional, Non-Bank) Capital:
    1. The EB-5 Immigrant Visa Program — encourages foreign “angel” investors to come to the US, obtain a US green card and help financing one or more private enterprises.  Typical minimum investment required to quality for EB-5 visa status is $500,000 per immigrant investor (more)
    2. Revenue Contracts — such as TIGRcubs, a hybrid of debt and equity, long established but only recently used more broadly for startups.  Such contracts exchange a percentage of your top-line sales revenue for an infusion of capital that can be used for any purpose.
    3. Equipment leasing — not considered debt, leasing equipment is an option for many early-stage businesses that preserves working capital.
    4. Factoring of Accounts Receivables — short-term funding, similar to trade financing when working overseas, allows you to receive cash as soon as you ship and bill or invoice your buyer.
  12. Venture Capital — like banks, most VCs have stringent investment criteria and tend to specialize in select industries they perceive as offering the greatest potential for strong returns. The reason for this is that they want to be able to take their exit (a “liquidity” event, alias “cash out”) at a substantial multiple of the original investment.  Similar to Impact Investors in several ways, their specialization means do your homework.
    Don’t try this at the office:  Cold-calling a VC usually wastes your time; better to approach with a warm, third party introduction … someone they know and respect.  Second, don’t expect to retain control.  You’ll probably have to give up multiple seats on your Board of Directors and offer shares that have various preferences and rights.  Ask if they are willing to accept a minority stake.  Lastly, be sure there is a strong affinity, shared vision and values — far too many young companies have horror stories about what happens when there are mismatching values.

Don’t know where to start?  Call us at +1.831-761-0700 or contact us with your project’s current readiness score (RAIN) — stands for Readiness and Investment Navigator.  We’ll provide a free financeability report.

 

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