You should have a strategy for funding your business. It isn’t something that you should just wake up one day and say, “gee, I think I need some money!” It is something you should think about, plan for, and implement well ahead of the time you need it.
There are different types of capital that you can use at differing times in the life of your business. Each has its pros and cons, andhere are some things you should think about as you are developing a funding strategy:
- Investors are going to want you to have “skin in the game.” You need to have some of your own capital at risk to prove that you are passionate about what you are doing.
- Your company valuation will be higher the further along you are in product development. Great vehicles for this are SBIR grants (if you have a technology-based business) or debt (if you have collateral that can secure the debt), and either method gives you greater control of your company.
- The earlier you take in outside money, the riskier the investment — investors will want a bigger stake and/or higher returns.
- The more individual investors you bring in, the more difficult it will be to bring in institutional investors (the capitalization table gets too messy).
- The more investors you bring in, the less control you will have (on the flip side, it is better to have 1% of a $100 million business as opposed to 100% of a business that is worth little or nothing!).
What’s the best way to fund your business? Generate some sales!
Here is a Kauffman Sketchbook video on how start-ups play the money game.
Here is an overview of different capital sources and when they are most appropriate: