How to Develop a Plan for Financing Your Own Business - dummies

How to Develop a Plan for Financing Your Own Business

By Consumer Dummies

Before you talk to anyone — even your grandmother — about money for starting your own business, have a plan in place, a set of strategies for targeting the right amount of money from the right sources. Here are some guidelines for putting together a plan that works:

  • Seek what you actually need, not what you think you can raise.

  • Look at how your company grows and define the points when you’ll most likely need capital.

  • Consider the sources of money available to you at each stage.

  • Make sure that the activities of your business let you tap into the correct source of money at the right time. For example, if you know that you are planning an initial public offering (IPO) in three years, start putting in place the systems, controls, and professional management that you’ll need before the IPO takes place.

  • Monitor your capital needs as you go so that you don’t have to return to the trough too many times. Every time you go back for another round of capital, you give up more stock in your company, and the percentage you own declines.

You can come out a winner if you prepare for your future capital needs. Just follow the lead of one technology company that produces custom productivity and e‐commerce applications. This company keeps itself in a good position to raise capital by

  • Creating value in the form of long‐term customers and great products.

  • Running a profitable business.

  • Keeping cash flow positive.

When you’re financing a traditional business

Traditional businesses typically follow fairly predictable financing cycles.

Three stages for financing the typical business.
Three stages for financing the typical business.

First‐stage funding is about getting seed capital to finish preparing the product and the business for launch. It’s also the stage where you seek funding to begin operations and reach a positive cash flow.

In the second stage, you’re usually looking for growth capital. Your business has proven its concept and now you want to grow. Alternatively, your customers have demanded that your company grow to meet their needs. To successfully use second‐round financing, you need to be out looking for capital in advance of needing it.

Third‐stage funding generally results in an acquisition or a buyout of the company. It’s the harvest stage for the entrepreneur who wants to take his or her wealth out of the business and possibly exit, or for investors who want to exit. In general, if you take on venture capital (a professionally managed pool of money), you are probably looking at a buyout or IPO within three to five years. That’s because a buyout or IPO provides the cash your investor needs to get out of the investment.

When you’re financing for e-commerce

It’s pretty easy to look at the funding stages of a traditional business, but the Internet has brought about some business models that don’t fit those stages well, if at all. Internet‐based businesses require a strategy that is part formula and part artistic achievement. Such a strategy is ill defined at best.

And sometimes it’s difficult to judge which concept is going to get funding before it launches, and which will have to bootstrap for a while to prove its concept. Grabbing early brand recognition from competitors online takes a lot of money, a professional management team, and the capability to grow in a hurry. If that’s your business, here are some suggestions for maneuvering through the capital maze:

  • Don’t take the easy money. You want the smart money. It’s okay to fund a traditional business with money from friends, family, and lovers. Doing so isn’t a good idea, however, when you’re seeking early stage capital for an Internet concept. Who is funding your business is as important as how much they’re giving you. Be sure that you associate with people who attract the right kind of money to your venture.

  • Get an introduction to the money source through one of your ­advisors. Be sure you exercise due diligence on the investor to find one that has worked with your type of business before and has compatible firms in its portfolio that provide synergies with yours.

  • Don’t get married on the first date. Large quantities of money are available for great Internet concepts. If you have such a concept, you may have more term sheets (agreements listing what an investor is willing to do) than you know what to do with. It’s tempting to grab the first term sheet under the assumption that the first is always the best. The agreement may be for the most money, maybe not, but the investor may not be the most compatible with your business.

    Compatibility is even more important than money, because the money source has a lot to say about what happens to your business. So, consider all your options before selecting one.

  • Take the deal that moves you on to the next stage. The biggest deal doesn’t always win. What you’re looking for is enough money to get you comfortably to the next round of financing and an investment firm that adds value to what you’re doing in the form of introductions, contacts, advice, and so forth.

  • Get your website up as quickly as possible. Don’t wait for the perfect site. Get up and running and start receiving feedback from potential customers. You need to keep the momentum going and collect data on the people who visit your site. This is important information to have when you talk to your investor.

  • Buy the best management you can get with your capital. Investors are practically unanimous: The management team is more important than the business concept itself. When you obtain money, invest in the best management you can get. If you have to bootstrap with your own funds, seek a strategic alliance with a company whose great management you can leverage.