Have you given up hope of raising money for your business? I hope not, because there is a good chance you've just been asking the wrong funding source for the wrong amount of money at the wrong time.
The great news is once entrepreneurs understand the basics of targeting investors and lenders; they feel more comfortable asking funding sources for money. Even better, they tend to be more successful too.
Here’s what you need to know:
Bank lenders vs. equity investors.
Going to a bank to obtain equity for a startup company is very much like going to a luxury shoe store to buy a pair of flippers. Someone is going to have a good laugh at the entrepreneur’s expense.
Commercial banks are appropriate funding sources for steady, revenue-generating businesses that want to borrow money against the company's tangible assets like inventory, equipment or receivables. Today’s federal banking regulations are strict. Banks are not allowed to lend money to young companies that don't yet have the proven cash flow to steadily repay a loan with interest.
If your company is not yet generating revenues and you don’t have hard cash to pledge as loan collateral, don’t waste your time asking a bank for cash unless you are withdrawing it from your own checking account.
In contrast, certain types of equity investors love funding startup businesses. These investors are patient too. They hope to make money on the growing equity value of a company rather than mere quarterly interest on a loan. Ideally, investors will make serious money with the founding entrepreneur when the company is sold to another corporation or completes an initial public offering of the company’s securities.
Angel investors vs. private equity investors.
Angel investors are private individuals who write checks directly from their personal savings accounts to startup and fast-growing companies. They are great sources of capital for startup entrepreneurs and small business owners who may need just $10,000 to $100,000 to advance their businesses.
Private equity investors, which include venture capital funds and buyout funds, are professionally-managed firms that invest on behalf of large state pension funds, family foundations and mutual funds. Private equity firms have deep pockets and prefer to deploy millions of dollars in high-promise businesses.
Both angels and private equity investors have great performance expectations for their money. Forget about paying equity investors measly interest. At a minimum, angels and private equity investors want to earn 4 to 10 times their invested capital in less than 7 years.
Sector vs. generalist private equity investors.
There are over 1,500 active private equity funds in the U.S. Some funds only invest in specific business sectors. Khosla Ventures, Nth Power and Braemar Energy Ventures, for example, invest primarily in innovative energy technology companies. Other funds specialize in funding bio-tech companies, media companies, manufacturing companies or even companies that do business in China.
Generalist private equity investors say that they have "broad" investment interests and will review business plans and funding opportunities in many different industries. To maximize funding potential, entrepreneurs should research private equity funds that match their specific industry as well as funds that invest in a broad range of product and service companies.
Stage vs. stage-agnostic funds.
Perhaps the most influential factor that private equity fund managers use to guide investment activity is a company's "stage of business development." Pre-revenue startup companies are a good match for venture capital funds that describe themselves as “seed” investment funds. Some seed stage funds are willing to invest as little as $50,000 with additional funding available to companies as they achieve their product development goals.
"Early stage" companies have generally completed product development or started to generate revenues from first customers. Deal sizes for early stage companies range from about $500,000 to $10 million. "Expansion stage" companies, which can also be referred to as “later stage” companies, are more advanced that seed and early stage companies. Funding for expansion stage companies is often applied to international expansion, acquisitions, joint ventures or aggressive product or service line growth. Occasionally, expansion stage private equity funds will help founding entrepreneurs cash out of their business, in part or in full.
Stage agnostic funds are highly opportunistic and invest across the board – in seed, early or expansion stage businesses. They look for exceptionally well managed companies where there is a high likelihood of emerging market leadership.
I believe there is a perfect funding fit for every entrepreneur. The best matches seem to develop when entrepreneurs take time to perfect their business plans, know how much capital they need to succeed, and hire talented collaborators who are driven to achieve great things in business.
Susan Schreter is a 20-year veteran of the venture finance community and a university educator in entrepreneurship. Her work is dedicated to improving startup longevity and operating performance in rural, urban and suburban America. She is the founder of www.takecommand.org, a community service organization that offers the largest centralized database of startup and small business funding sources in the U.S. Follow Susan on Twitter @TakeCommand.