by Dennis J. Pitocco, MASTERMINDS Panel Member
I am currently a student at Penn State University, I am 21 years old, and I am seriously motivated to start and run my first business online. My first business will be tailored towards small business owners who don’t have the time or knowledge of utilizing social media sites as an online marketing resource. My goal is to conduct a small sample survey to determine the demand for this service, along with what the equilibrium price my consumers would be willing and able to spend. Starting and running one’s own business is time consuming and I believe my service will help for the continued success of their businesses. I understand it takes money to make money. My part time job is not providing me with enough startup cash I need to feel comfortable starting this online service. My questions are as follows:
- How can I raise the startup cash I need to start this project, or future projects without taking out a bank loan?
- If I need an investor, what are these individuals looking to see and hear to be persuaded to invest their money into my business/service?
Dear Aspiring Entrepreneur:
The old saying is true: it takes money to make money. That’s why so many businesses around the globe attempt to raise funds for their startup each and every year. With literally hundreds of new business ventures constantly coming into the market, raising funding for your business can be competitive and challenging. However the good news is, that although many entrepreneurs think that their only option is to seek a traditional bank loan to raise startup capital, this is simply not the case. Our research suggests that there are several other viable alternatives you may wish to consider when determining how to raise money for a startup business. While certain of these may not be viable for you today, they are nevertheless worthy of consideration as your start-up journey continues:
Angel investors: Many people think that angel investors, or individuals who are willing to provide business start-up capital in exchange for ownership equity or convertible debt, are only interested in investing in companies with an established track record. However, this is not necessarily true. If you have an innovative, unique business idea, it is perfectly plausible to find an angel investor.The trick to piquing the interest of an angel investor is that you must be able to show how you plan to grow and progress your business, and therefore how you will begin to gain meaningful profits. Therefore, you will have to spend some time researching and formulating a detailed business plan. You should be thoughtful and deliberate when approaching angel investors. Think about what type of business person would be interested in investing in your business. Also keep in mind that gaining an angel investor is usually not a quick process; it may take several months, and you may be required to meet with several individuals or groups of individuals to do so.Another important factor to keep in mind with angel investors is that you probably should not expect someone to simply write you a check, hand it over and walk away. Because the investor will own part of your company, he or she may want a say in how the business is run. Because angel investors are often small business success stories themselves, this could potentially work in your favor. But make sure to keep this in mind and know that it is a possibility before approaching angel investors.If you’re interested in gaining an Angel Investor but don’t really know where to start or whom to ask, try checking out the website AngelList, a social network that connects startups with investors. The network was founded in 2010, and deals made here typically range between $50,000 and $1 million.
Bartering Do you remember back in 2006 when Kyle MacDonald began with only one red paper clip, and repeatedly used Craigslist to barter items until he obtained a house? Well, most of us probably don’t have Kyle’s bartering skills, however, bartering can still be a great way to get what you need for your small business startup. Obviously, the best thing about this is that in order to barter, you need only your skills and time; you don’t need any money.To begin bartering, you will need to consider what services you would like to offer as your barter, and also carefully consider the value of your time versus the money that you wish to obtain. For example, if you’re offering a new website design to a business in exchange for startup capital, how much time will it take you to complete the website, and what is your time worth? If you’re bartering a service for another service, make sure to have an open dialogue about whether this is an even barter. Bartering is about establishing positive business relationships, so be honest.Make sure to always draw up a contract for your barters, and remember that you will still have to pay taxes on the income you receive as part of your barter.
SBA loans: The U.S. Small Business Association (SBA) provides loans and microloans to non-profit organizations and small businesses for startup costs. These funds come from local non-profit community lenders. A loan from the SBA may be up to $50,000, while the average one is $13,000; the average microloan is around $10,000. The maximum repayment term for each loan is six years, while factors such as eligibility and interest rates vary depending on the intermediary lender. When the SBA loan program first began, most of the loans were character-based, meaning that they did not require any collateral. However today, most of the loans do in fact, require some sort of collateral. For more information, visit the SBA website.
Crowd funding: Crowd finding is a relatively new, innovative way to gain money for your startup business. Unlike angel investing, crowd funding tends to be a little less formal. Instead of pitching to an individual or group of individuals, crowd funding is thusly named because it is achieved by getting a large number of people to each invest a small amount of money in a project. Crowd funding has grown in leaps and bounds due to the popularity of social media sites in recent years. Oftentimes, artists, musicians, and other creative professionals are able to find success with crowd finding by showing or displaying their talents, thereby earning support. Crowd funding does not need to involve people you know; in fact, you will probably receive most of your backing from complete strangers. One of the benefits of this method is that it involves a large number of small financial contributions, and these people will not have a stock in your company (unlike with angel investing).One crowd finding site that has become popular and gained widespread use is GoFundMe. This site works by allowing users to set a financial goal, and a time by which they wish to raise it. It is commonly used to raise money not just for business and education ventures, but also for medical payments and charitable causes as well. The site allows you to create a “personal donation site,” and track your donations. No out-of-pocket money is required to create a site; GoFundMe takes 5% from each donation you receive. Your donors are not charged any fees to donate through the site.
Venture capital: A venture fund, also known as venture capital financing or funding, can be accomplished in a couple different ways. The most common way is to secure financing from a single investor for an agreed-upon amount of time. The goal is to keep the business fully operational and fully funded until that designated point. The expectation is that by that point, your business will have secured a client base, and will have developed the ability to generate revenue to cover all of your costs, including the ability to issue payments to your investor.Another option is to secure funding from more than one investor. In this case, you can seek out a venture capital group, wherein each member of the group pledges a certain amount of resources in exchange for a percentage of the profits generated by the business venture.The important thing when considering venture capital as a means of financing is to clearly establish all of the repayment terms in a contract for all of the people or parties involved in the venture. Venture capital investments are generally made as cash in exchange for shares and an active role in the invested company.
Friends and family: When seeking financial support for a business, it’s not a bad idea to turn to the people whom you are closest to. People like to invest in not just an idea or concept, but in a person to. Very frequently, money from family and friends is the first round of financing when it comes to a startup business. You might be able to receive enough to get some of your preliminary ideas and concepts off the ground, therefore carrying you to your next round of financing. The only downside to asking friends and family to finance your startup is that it mixes business with pleasure. Sometimes when small businesses fail, friendships can falter. And sadly, more than 50% of small businesses in America fail during their first five years. So if you turn to friends and family for your first round of financing, make sure to be clear with them about the risk that is involved.
Credit cards: We all know that credit cards are not a permanent solution to finding money. They should be viewed as a temporary problem-solver only. That being said, credit cards have been used by many entrepreneurs to get their ideas off of the ground. In the mid-1990s, the founders of Google funded their startup using credit cards. They were aware of their credit limits, so they purchased second-hand computers and used open-source software. So if you decide to use credit cards, it is not a bad choice, because they are quick and easy. But you should be aware of your limits and interest rates; do not use credit cards as a free pass. If you take the time to shop around for a good interest rate, carefully manage your credit score and follow a solid, faithful payment plan, credit cards can be a practical solution.
Pawning or selling collectibles: You may be surprised by what people will pay for antiques, collectibles, and other assorted “junk” items that you may have stored in your garage or attic. Why, just recently, an antique bowl that was sold at a garage sale for $3 ended up raking in $2.2 million at auction. Will this happen to you? Well, probably not. But that doesn’t mean that you can’t profit from the goods you have around your house, and today there are ways to sell them that makes the process easier than ever.To undercut the fees that brick-and-mortar pawn shops charge, try one of the newer cyber pawn shops to sell your collectibles. Sites such as Pawnup.com and PawnGo.com have very low service fees (around 3 percent) and are easy to use. The process involves starting with an online form on which you describe what you wish to pawn. The site then decides whether or not to make an offer on your goods. If a monetary agreement is reached, you are then sent packaging and shipping materials to ship your item to the company. Once the site receives your items, it wires you the pre-determined monetary amount.
Revenue-based financing: Revenue-based financing is a type of loan that can be a great option for small businesses that are unable to borrow money through a traditional bank loan due to lack of assets. In a revenue-based loan, instead of paying a fixed amount of interest, borrowers promise to pay back the loan through a share of future revenue until the debt is satisfied. A significant difference about this type of loan is that it does not depend on a company’s profitability or collateral. Instead, they allow payments to fluctuate, which can be accommodating for businesses with seasonal differences in cash flow, or inconsistent profits.
Business partner: Ben Cohen and Jerry Greenfield (Ben & Jerry’s); Steve Jobs and Steve Wozniak (Apple); Bill Gates and Paul Allen (Microsoft); Bill Hewlett and Dave Packard (HP); William Procter and James Gamble (Procter and Gamble). Lots of very successful businesses have been founded by partners. And of Inc.’s top 500 businesses, 28 percent of them were established by companies with co-founders.Selecting a partner for your business is no easy task. Many successful partner companies including some of the ones listed above, were founded by people who had long-standing friendships or had attended school together. But some of them were never really friends, and some of them don’t even really get along all that well today, despite their remarkable entrepreneurial achievements. So a business partner can be a friend or family member, but does not necessarily have to be. It’s most important to find a partner whom you trust with partial control of the business, and whose business ideals are aligned with yours. No matter how much you like or trust your business partner, always have a buy-out agreement in writing in case the business relationship breaks down.
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