One of the major obstacles Entrepreneurs face in starting a new business is where to go to raise the required money they need. It can also be the most time consuming, frustrating, and disheartening factor in start-ups. Here are some suggestions on where not to go that will save you time, energy, and angst. By not going there, you can focus your energies and precious time on more realistic prospects.
1. Banks – At first blush, this may sound crazy as that’s where the cash is. Banks are also one of the cheapest forms of acquiring money. However, you need to understand how they work. First, they generally are not interested in loaning to start-ups. They want established companies that they can see some numerical history to help them determine the probability and risk of getting paid back. No matter what their individual criteria are-which can vary between banks they will not loan a start-up money unless the principals sign personally and have assets to back up the loan in case of default. Bankers focus on the negative side of new ventures: How can I recoup my money if the business fails? Their depositors do not expect them to risk their money; and for this safe approach, they are satisfied to receive a lesser return on their money.
On the other hand, investors focus on how fast can the company grow and how big they can get.
2. Venture Capitalists receive a tremendous amount of media publicity about their big hits with famous high profit companies. The truth is they expect that most of their investments will fail.
Here are some of the things they want before investing in a company:
– Proven successful owners.
– A team of experienced people in place.
– A quality business plan whose idea needs to win out against strong competition. Perhaps two out of 1,000 plans they look at will be chosen for investment.
Scalability—They want to invest in companies with high growth and profit potential within 5 years.
You should also know they will insist on a high equity position in your company and most likely the ability to take it over if you can’t make your projections.
3. Family – a good source of money for start-ups as they know you, are on your side, and will not scrutinize your plan like outsiders. However, I would caution start-ups to think twice before accepting family money if they feel the family member cannot afford to lose the money and also does not fully understand the risks.
So, save yourself a lot of time and aggravation and don’t look for money from bankers and venture capitalists if you are a start-up. Down the line, with some success behind you, they may be perfect.