If you want money, sometimes you’ll have to beg, borrow and steal. Fundraising for your start-up isn’t always as easy as you may have imagined. In fact, raising money can be a big waste of time, especially if your company ultimately does not need the funding. Business funding can often be likened to “picking your poison.” There will always be a trade-off of debt risk or company equity. Each founder will need to determine whether or not the funding is worth the money or partner expertise provided by equity partners. With work with each of the following types of funding. If your company absolutely needs financing, you’ll certainly not want to leave any stone unturned. The caveat is that each method comes with its own inherent benefits and risks. Here are a few insights when exhausting all methods for financing your company.
The forms, types and functions of various private equity groups differ as greatly as the businesses in which they invest. If you seek financing from PE groups, you’ll generally need to understand that private equity is less early-stage than most surmise. In fact, most private equity groups represent institutional funds looking for steady returns. They’re more likely to invest in existing cash-flows and long-standing legacy companies. Unless your company has existing traction, needs investment to take some risk away from owners or requires growth capital to take the business to the next level, private equity may not be a good fit.
There are certainly exceptions, but most forms of PE will be seeking cash flow and investing in profit streams. Private equity is often focused on strategic M&A for diversifying a vast portfolio.
Private Equity separates itself from Venture Capital in a number of ways. VC funds also may utilize institutional money, but they generally are known for going for early-stage investments. The hope is that one in twenty innovative companies will become the next Facebook and literally explode. The one upside to Venture Capitalists is that they tend to be highly-sophisticated. They’re usually comprised of savvy investment managers whose job is to eliminate business-lemons by simply viewing executive summaries and meeting for five minutes with company management. This is also the downside to VC. Money comes less easily when you’re highly-scrutinized.
The truth of the matter is that most VC funds have under-performed over the last decade. Unless strategically innovates itself, it may be a dying breed in its own right. Another consideration is that money has not been flowing for early-stage like it once was. Prior to dotcom and pre-Recession, deal-flow was easier.
Angels are a unique breed. A combination of more small-time private equity and individual private placement investors. Angels tend to be less-sophisticated, but still difficult to please–and interesting mix that can create a “corralling cats” situation. They invest smaller amounts, require more hand-holding and are wholly more time-consuming than perhaps any other group because they ‘re generally less-diversified. In short, they have more vested interest to ensure their investment does well. They can be made of up pretty eclectic groups of the independently-wealthy: physicians, dentists, entrepreneurs and the wealth inheritors.
For angel groups that lack understanding of initial deal structure, they run the risk of being heavily-diluted later by the more sophisticated venture capitalists when more money is needed to keep the boat afloat. If you absolutely need funding and you’re not a candidate for the former two groups, angels may be a good option. Certainly each group has their risks and issues, angels are a bit more weighted toward drama which you may not want. Tread with caution.
Debt financing is where “pick your poison” applies most readily. While you’re not giving up equity, you’re increasing the risk inherent in your business. While you’re not giving up equity, you are putting another stakeholder in line in front of equity holders. In the event of bankruptcy, equity is subordinate to debt. That is, creditors are paid first in the event of bankruptcy.
The upside of debt is the fact that debt is not a squeaky wheel. As long as you make your payments, you don’t have to receive phone calls or emails from other investors wondering how their money is being utilized.
Bootstrapping makes for the best bedtime entrepreneur stories. You don’t give away anything, except for time. However, time can be what some companies need to fully understand the best model for their niche. Sam Walton realized this in his early days as an underfinanced bootrapping owner of Wal-Mart:
Many of our best opportunities were created out of necessity. The things that we were forced to learn and do, because we started out underfinanced and undercapitalized in these remote, small communities, contributed mightily to the way we’ve grown as a company. Had we been capitalized, or had we been the offshoot of a large corporation the way I wanted to be, we might not ever have tried the Harrisons or the Rogers or the Springdales and all those other little towns we went into in the early days. It turned out that the first big lesson we learned was that there was much, much more business out there in small-town America than anybody, including me, had ever dreamed of.
When it comes to “begging, borrowing and stealing,” you’ll need to do some heaving weighing of the risks and opportunity with each option. In some cases, bringing in the right industry-specific executive investor may give you the connections and expertise needed to take the business to the next level. If you’ve got the time, but don’t have the connections, sometimes you’ll have to pull a Wal-Mart and work by bootstrapping. At least you’ll avoid some of the fees associated with doing deals.