Finding Funding for Your Startup
You're ready to start your own business. You have an innovative idea, all the expertise you need, and passion beyond measure. Now all you need is the money.
Funding is a great quandary for most budding entrepreneurs. No matter how assured your success is, you have to get past the initial financial hurdle of staying afloat in order to prove yourself to venture capital companies and other, more traditional sources of income. Informal sources of financing - including friends, family members, and colleagues - represent the most common methods of startup funding, but there are other resources available.
The importance of robust initial funding cannot be overstated. According to Investopedia, the failure rate of startups in 2019 was around 90%, and the top reason for failure was that the business ran out of money. Having a cushion big enough to allow you to get established, iron out the kinks and build a reputation is essential, but so is knowing exactly what you want to do with the resources that are provided and when you are going to do it. Having a plan in place provides potential investors with the confidence that their money is in good hands. It also gives you a framework for gauging your own progress, and the ability to react responsively to the market.
Your startup plan should include all appropriate milestones, from testing your product or service to the purchase of necessary equipment and hiring staff. Financing and liquidity will be needed long before you're ready to launch, and that means your search should begin no later than twelve to fifteen months before your planned open date and will continue to be necessary while you establish yourself. Different sources of funding will be appropriate as your startup evolves, and it is important to recognize each stage for what it is and to know where to turn for financing throughout.
Funding Resources for Each Startup Stage
The Ideation Phase This stage of your business development comes shortly after the moment when you decide to turn your idea into reality. You have recognized an unmet need as well as a way that you can meet it based on your experience and knowledge. Your belief is strong enough that you decide to test your idea but need financing to do so. This is where you turn to your network of friends, family, and colleagues and ask them to demonstrate their belief in your theory, but in order to do so effectively and to inspire their confidence, you need to do more than explain yourself. You need to back your passion up with a business plan that spells out exactly why you think it will work and what steps you will take to make it happen.
If your network's pockets are not deep enough to consider as a resource, there are other options available. A quick internet search reveals that there are many organizations eager to help budding entrepreneurs. These companies and philanthropies sponsor scholarships and contests specifically designed to fund innovation, but competition for their funding is fierce, making a well-thought-out plan even more important.
The Prototyping Phase Once you have formulated your product or service and identified an interested demographic, it needs to be tested and improved upon based on your findings. This is known as the prototyping phase. At this point, your idea is fleshed out enough to attract financing from business accelerators or incubators. These organizations look for companies that they can mentor and guide in the development of products or services. They help navigate the business aspects that most entrepreneurs are unfamiliar with, including management training, business plans, product or service improvements, focus groups, and more. These services are offered in exchange for a portion of future profits. The U.S. Small Business Administration is another source of funding during the prototyping phase, and so too is crowdfunding through online platforms such as Kickstarter.
The Launch Phase The excitement of moving through ideation and prototyping culminates in the launch phase when your developed product or service is ready for the market. Funding remains important, but because you have not yet proven yourself through profitability your sources will likely remain the same as in earlier stages. At this point, it is often a good idea to move beyond offering equity in your organization to alternative instruments that can later be converted into equity-based upon future valuation. This conversion to debt offerings allows entrepreneurs to retain control and maximize their own interest as the business moves forward and grows.
Once your business is established and has proven itself, you enter a different phase in which you are better able to attract investment from professionals, including venture capital firms. Planning and documentation continue to be essential to success in soliciting funding, so be sure to maintain excellent and readily available data on sales figures, profitability, and forecasts that confirm the return on investment that these firms seek.
About Frank Jenkins Jr
Frank Jenkins Jr. CPA is the managing partner of Adams, Jenkins & Cheatham, a CPA practice based in Midlothian, VA. Frank specializes in Consulting services, tax planning, audit & assurances. "I genuinely care about our clients because I have a personal connection with them."
He is active in the community and belongs to the AICPA and the VSCPA.
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