In a previous post, we detailed the first three phases of fundraising for startups: seed, early, and friends and family phases. These early phases have one thing in common – most of your capital comes from you and your family. Jim Marshall of Silicon Valley Bank jokingly calls these the Three Fs of Startup Finance: family, friends and fools. Those Three Fs are important to your early stages because they help you get your concept off the ground, and they send a message to venture capitalists and other investors that you’re the real deal – other people are willing to take a risk on you.
Startup Phase 4: Outside Sources
Angel investors and venture capital: When it comes to Phase 4, Marshall says you’ve got to go down multiple paths in capital raising, and while cash is great, not all money is the same. Know what type of investor you need. Find someone with experience in your industry who will bring something to the table in addition to capital, such as a network of potential customers, access to talent and marketing expertise. How do you find these investors? You’ve been attending networking events, connected with local organizations that support small businesses and you’ve spread the word that you’re looking for backers. Angel investors typically offer additional resources that help get a product or service to market, but they don’t take part in the day-to-day running of the business. Venture capitalists typically take board seats and participate in running a business.
Banks: Bank and financial institution loans make up 17% of startup funding. The bank will review your credit history, business plan and track record. Most banks want to see two to three years of financial statements. They also want to see that you’ve invested in your own business. If you have loans from friends or family, the bank counts them only if they’ve been formalized through a financial adviser or attorney. At the very least, put something in writing that spells out the terms of the loan and that cash from mom and dad was not a gift.
Grants: These account for less than 1% of startup funding, and a number are available if you know where to look. The application process is similar to that of a loan, and the granting institutions scrutinize them closely. For a list of grant sources, see Grants.gov.
Marshall suggests finding an investor who has started a company in your industry or a related industry. They are better equipped to propel you through growth.
Startup Phase 5: Go Public Or Sell
When a company becomes fully operational and profitable, offering high potential for growth, the owners might consider making an initial public offering (IPO) or selling the company outright. Not every company does this; some are happy as privately owned enterprises. Dell, Ernst & Young and Enterprise Rent-a-Car, for example, are among Forbes’ list of 20 biggest privately owned companies in the U.S.
How do you know when it’s time to go public or sell? There is no formula, and when the time comes, you’ll rely on your financial advisers, investors, board of directors and co-owners to create several scenarios that project income and expenses.