We are often asked about how a company can get its initial financing. There is usually considerable misunderstanding about the various alternatives and their implications. This article positions the various alternatives that a company should consider before embarking on a financing strategy.
Starting Your Company
From the time you have the idea for a new company until you are ready to actually launch the products or services, financing is required to prepare your company for doing business. Such expenditures are:
* Market research and competitive analysis
* Business and financial plan development
* Product or services development
* Marketing and sales planning
* Management team development
* Patents, copyrights and trademarks
* Incorporation and other legal matters
When you are still at this idea development stage, there is no opportunity to reach out to sophisticated angel investors or venture capital firms. Your company is not mature enough for them to consider it. In order to finance these activities, you need to consider the following alternatives for seed funding:
* Founder funding
* Grants
* Loans
* Friends and family
Let's take each one and explain the purpose and implications.
Founder Funding
Sometimes the founders of the company have the financial resources to provide the seed funding of the company. The founders may be successful entrepreneurs or business people, who have the capability to provide this first round of funding.
This is ideal in many ways. There is no outside funding required. The founders will own the entire company in this first financing stage. Future investors will see that the founders have initially put their own resources into the company.
Grants
When market research and proof of concept have not been established, getting a grant to complete this work is very advantageous. Sometimes the process of applying for and administering a grant are long and tedious, but the rewards are significant in that you usually do not have to repay the grant in any way.
Some of the most attractive programs are the SBIR grants available through the US government and its participating agencies. You should contact the Small Business & Technology Development Center (SBTDC) to determine if you could qualify for a grant with such agencies as the Department of Defense, Homeland Security, the National Institute of Health and many others. Go to their website at www.sbtdc.org to learn all about it. Also, many of these grants have matching funds available from state governments. For example, North Carolina is one that offers such matching funds. Of course, there are many grants that are possible from private foundations and corporations, all of which should be investigated to see if your company is eligible.
Loans
This may sound ugly but you may have to consider it. Banks do provide loans for businesses, but there is no panacea about it. They will want the loan to be fully collateralized by someone. If you have the assets to provide the backing for the loan, like stock or other assets, you can do this yourself. Of course, if you had those assets, you might have considered liquidating them to provide the seed financing in the first place, but sometimes you may want to keep the integrity of these assets without liquidating them. Either way, these assets will be locked in by the bank to back the loan. You can also consider a business partner for providing all or some of the loan backing as well.
The upside of this alternative is that you will still retain ownership in your company, but you will have to pay off the loan whether or not you succeed or fail.
Friends and Family
Quite frankly, this is the good old fashioned way of getting seed financing. Entrepreneurs simply go to the people that trust them and know them the best and ask for funding for their business idea. This form of financing happens every day in formal and informal agreements between entrepreneurs and their family and friends.
To accomplish this, you simply create a list of all the people you know who could finance your company or who could refer you to people who could finance your company. Then, you approach them with your business idea and offer them a share of the opportunity for the seed funding they provide.
You will have to be fair with them in providing an appropriate share of ownership in the company for the large risk they are taking in financing your company at this very early stage.
The advantages are that you are doing business with people that know and trust you, and the process to close on funding is usually very simple. The downside is that, if you fail, you have lost the money you obtained from these close family members and friends.
Summary
Finding the initial funding for your company will take a lot of your time. Spend the time to establish a solid financing strategy and do your best to be prepared to execute whatever alternative you choose. You will not get any second chances at this otherwise.
Financing Alternatives - To learn more about this author, visit Bill Warner's Website.
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Bill Warner
(Visit Bill's Website)
Bill Warner is the founder and Managing
Partner of Paladin and Associates(www
.paladinandassociates.com), a firm
that helps executives create successful
businesses by providing a broad array of
executive services. He is also Chairman of
the Triangle Accredited Capital Forum, an
angel investor network that reaches
throughout the southeast. Bill has more
than thirty-eight years of experience in
the computer industry, with the last
twenty years as a CEO and general manager
responsible for computer software and
hardware businesses. He most recently
served as President and CEO of LiveWire
Logic, a customer relationship management
company in the service and support market.
Previously, he was Executive Vice
President of Products and Services at
Dialogic, an Intel Company, and a $400M
computer telephony company headquartered
in New Jersey. Prior to that, he held
executive positions at Banyan Systems,
SystemSoft and IBM. He is a member of the
Council for Entrepreneurial Development,
Angel Capital Association, Raleigh Chamber
of Commerce, North Carolina Citizens for
Business and Industry, North Carolina
Technology Association and National
Association of Corporate Directors.
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