Infusionsoft Co-Founder Clate Mask calls himself a bootstrapping evangelist. “When I was in business school, we learned the ‘MBA way’ to grow a business,” he says. “You write a business plan, raise some money and then roll it out. Not only is that the wrong approach, but gives false hopes.” Mask says a business plan alone isn’t enough to win loans, grants and capital investments. In fact, there are several fundraising stages that startups should follow, if they wish to be successful.
The many ways entrepreneurs get their ideas off of the ground are as innovative as their inventions. In fact, it’s a rarity to see an early stage startup business that is responsible for 100 percent of its initial financing; most companies use several sources, which change as the business grows.
However, there is one thing that most startup experts agree on: Expect to spend your own money.
Startup Phase 1: Seed Phase
Entrepreneur says Americans spend $185.5 billion of their own money and credit to pay for startups every year.
During the seed stage of a startup, the founders use their own resources to get ideas off of the ground. This includes money from credit cards, personal savings, and personal loans. This is the earliest phase of a startup; it typically occurs before corporation and patent paperwork have even been filed. The seed phase begins when you draft a business plan.
Jim Marshall of Silicon Valley Bank says the seed phase is the time to be a bit scrappy. He says in order to be backable by investors in later phases, you must exhaust your resources and been creative in trying to build something on your own. Does this mean dipping into the kids’ college funds? No. It means you’ve put cash and sweat equity in your dream.
Startup Phase 2: Early Phase
At this point in the startup fundraising stage, you should have a tax ID number, website, and the foundation for your business. You might even have a beta or prototype of your product or service. In the beginning of Phase 2 you can expect to be spending your own funds. This is also the time that you truly learn the difference between necessities and luxuries. “We didn’t buy a copy machine until we were doing a couple million in annual revenue,” Mask says. He says they borrowed from neighboring businesses and found work-around solutions.
Startup Phase 3: Family and Friends
Once your business plan begins to come together and you start hitting those all important milestones, then and only then are you ready to move on to Phase 3. In the words of Jim Marshall, it’s time to hit up the Three Fs: family, friends and fools.
Personal and family funds account for about 75 percent of startup financing, according to the Entrepreneur. This includes:
36% owner/family equity
12% personal loans
9% family loans
6% other friends/family sources
5% home equity loans
4% personal credit cards
3% business credit cards
The remaining 25% comes from business loans and outsider equity, such as venture capitalists and angel investors. Always show due diligence when approaching an investor; family and friends should be treated in the same way that you would treat a bank or venture capitalist.
Any one of these potential investing groups wants to see a founder with a stable team, who are able to work cohesively and attract other great people to their visions. For example, can your team persuade people to quit their jobs to join your startup? Have you attracted some of the top industry minds to offer support? Have you begun to see your first potential customers? If you answer “yes,” you are well on your way to exiting the early stages of fundraising and moving into the later stages of startup fundraising.
Before entering into the later stages of fundraising, be sure to have mapped out your next big milestones. Figure out exactly why you need the capital and where it will be spent. And always remember, when it comes to fundraising (and business in general) you always want to under promise and over deliver.