How To Raise Capital for an Early Stage Business in California

How To Raise Capital for an Early Stage Business in California

Introduction

Starting a new business or securing more finances to grow a startup can be an overwhelming task. The internet is full of businesses that are willing to loan money to entrepreneurs. There are even websites dedicated to connecting entrepreneurs with investors. Many of these business models require subscription fees or charge percentages of the funding secured in order to make their money.

While this is probably not the best way to go, there are dozens of other investors out there who are willing and able to help fund your startup, you just have to research what they require to fund your business. Knowing the different types of startup funding can be paramount when it comes to selecting the best way to raise capital for your small business.

All great titans in business started somewhere – Microsoft, Amazon, Apple, even IBM all have humble beginnings, starting in small garages with just a few employees, dedication, and a commitment to being the best at what they do. Many different types of startup funding exist for the many types of businesses. Not all of them are relevant to every business, but usually a new business has access more than just one type of funding.

One of the most important things to remember when securing funding for your startup or small business is that you want to solicit it from an accredited investor.  These are people or institutions that have higher financial profiles than the average Joe, who have great credit, and a certain degree of experience in the investing world.

When talking about sources of investment funding for small businesses, one business that comes to mind is Amazon, created by Jeff Bezos.

Friends and Family

In 1994 Jeff Bezos, a financial manager and computer scientist had an idea for a bookstore that would be do business exclusively on a new computer platform called the world wide web. He would call the bookstore Amazon, as in the amazon river, the largest and fastest river’s.  A suitable name for a company that would soon become one of the fastest growing in the world.

To start, Bezos was not without some small funding, but not a significant amount. It was true that the internet had gained some traction in wide scale adoption amongst consumers and with the advent of a reasonably priced computer system on the market, such a dream could possibly work – or be a complete flop.

Bezos would not be deterred and held a total of 60 meetings, with friends, family and investors. He pitched them the idea, which needed a great deal of explaining, and offered them each 1 percent of his business if they would invest $50K each. He managed to secure 22 investors at that time, and now two decades later those who would not follow him are scratching their collective heads. Today, this same 1% share of Amazon.com is worth about 7 Billion dollars.

This is the power of looking to friends and family for help with funding your small business. Not everyone has the money that Bezos had to start, or even the money his friends and family had, but his situation is a testament to the power of friends and family in business. While mixing blood and money is often not recommended, if you have strong roots for your business, and can convince friends and family to invest in your idea, it can be wildly successful for everyone involved.  The important thing is for people to not invest more than what they can afford at the time.

Funding from a unique source

Snapchat, the online photo sending app loved by millions of people across the world found an interesting way to build investors and create a winning IPO – schools and churches. In the early stages of development, Evan Spiegel CEO and Founder of Snapchat, approached schools and churches for small investments in a seed funding round.

Spiegel of course had quite the list of resources, having started with some of his Stanford professors and alumni, as well as some hefty funding from his parents who were successful lawyers in the Huntington Beach area in California. Nevertheless, the additional funding raised from churches and schools in the startup phase of their business helped to boost Snap’s capital pool early on, to make way for progress down the road.

These early investments netted those institutions millions in returns later as a result of Snapchat’s IPO. This really opens the door to funding, in early rounds, of a solid business plan that is already functioning and hoping to go public.  

Home Equity Funding

Sometimes, simply leveraging your assets can bring a business into the black, and offer a sharp return, especially if the business is already on solid footing, or has a strong model to work from. This is a tricky proposition for many people, but it can be done. The cash you can get from the equity in your property can spread payments over a long period of time at a very low rate and drop the interest rate to a more reasonable one than you might otherwise pay through private firms or lenders. The trick here is that equity fluctuates.

What your home is worth today, might change in a year or two. There was an influx of home equity drops in the later part of 2008, ruining finances and equity loans all over the country. Banks are more careful today, allowing the use of home equity less as a go-to option and more as a carefully thought out plan. Even in this paranoid financial market, taking out home equity loans to fund your small business or startup can be a safe and practical way to obtain early round funding without having to sacrifice stake in the company.

Government Grants, Loans, & SBA Loans

People mostly discount the government when it comes to resources for planning out a business funding round. The truth is, there are government grants for small business funding out there, but they have specific requirements that must be met in order to be awarded. The loan programs in at both the state and federal level are often times overlooked.

The federal government offers grants to nonprofits, educational institutions and local governments (state programs). These nonprofits, state, and local governments then offer funding for startups and small businesses through grants given directly to businesses through specific programs.

One of the few exceptions to this is the Small Business Innovation and Research Grants and the Small Business Technology Transfer Grants organizations. These grants have some specific requirements and business structures that must be met and carefully submitted. If awarded, businesses then gain funding by going through phases called funding rounds.

The Small Business Association has local branches throughout the country and offers loans to business owners in varying amounts. The SBA guarantees the loan to the lender, as a means to help the loan process. The maximum loan amount is $5,000,000 and of that the SBA guarantees 75%, which is $3,750,000. For loans under $150,000 the guarantee to the lender is 85%. The requirements are a personal or business credit score of 680 or above, a 10% to 20% down payment and collateral. Any loan that is $25,000 or less has no collateral requirement.

Angel Investors

Jeff Bezos, besides his family and friends, once received a $100,000 investment in his company from someone who just believed his company would do well. When that investor sought return for that investment it was worth about $240,000,000.00. That is a return that can be realized by an Angel Investor.

This small chance for massive returns is why some investors will invest “on spec” in a company that has no other guaranteed or realized return. Often times, Angel Investors may only be right on about 20% of their investments, while the other 80% fail. However, they do this in the hopes that these 1 out of 5 tat succeed yield a much higher return than the money lost in the Angel Investment funding of other startups.

These investors can be found, but there are a great many pitfalls as unscrupulous websites will charge fees for the supposed introduction to Angel Investors, for those in need of business funding.

The best way to approach this type of investor is through a website that offers face to face meetings, with the investor, at a predetermined time and place and only collects a fee for the meeting costs, such as a hall or room at a hotel. Some subscriptions are legitimate, but some are not. Careful research will reveal those introduction websites are worth joining.  

Personal Debit/ Credit Cards

Your personal accounts can help more than you realize. Taking out a line of credit in order to fund your business, or careful spending from a checking account can help your business secure much needed capital in the early stages of development. All the giants of business agree it’s the money you have, not the money you want, that makes the business work. Work within your means, have realistic goals, and success will follow.

When it comes to funding a business with credit or debit, be careful though. Interest rates on these cards are often as high as 20%, causing one $10,000 debt to quickly snowball into a formidable liability if not paid off right away or in a reasonable time-frame.

Personal Savings

This is very much inline with the debit and credit cards. A small savings account can get you up and running and working towards those all important funding rounds. A small website can get off the ground for under $1,000. And maintaining a retail or website subscription eCommerce site with some good advertising can be accomplished for under $100 per month.

Personal savings is definitely one of the safest ways to fund your startup or small business, provided that you have the funds to do so. It may not be as glamorous as securing seed funding, or taking out million dollar SBA loans, but it is equally a source of funding for a startup. For entrepreneurs who have the true succeed or die trying mindset, this is a strong option when first starting out to see if your idea and your passion behind it is worth the journey you are about to embark on.

Private Equity

Some companies just don’t want to become publicly offered. They receive capital investments and other funds directly from private investors in return for private shares in the company. These private investment firms are usually in the business of buying and selling companies and hold many companies in a portfolio.

They usually will require some control or stake in the company in return for their investment. The benefit to seeking investment from private equity firms is that they are usually very experienced in business, and will likely be able to provide much needed guidance to business owners on how to spend their funding, and how to make decisions to grow the company in the best way moving forward.

On top of this, because these investors have a direct interest in the success of your company through their stake in the company, they are more or less responsible for making sure that your business has the funding and the resources needed to succeed.

Business Incubators and Accelerators

Many times a college or municipality will offer a program whereby a small business or startup can receive help with many of the problems that affect them. These programs can offer space to work, some seed funding, training and other resources their larger and wider influence can provide.

Usually, these “business incubators” as they are called offer these resources to entrepreneurs starting small businesses for a fraction of the cost that normally would, and some even do it for free. Business incubators are a great way to secure funding for small businesses and startups because not only do they offer an environment to succeed and resources, they also offer expertise from people who have experience scaling businesses effectively, and assistance going through the various legal processes which businesses must go through.

Depending on where you are in the country, there are dozens of Business Incubators and Accelerators available to you. Some of the more commonly known business incubators are:

  • Y Combinator
  • StartX
  • Amplify LA
  • Capital Factory
  • MuckerLab
  • TechStars
  • 500 Startups
  • AngelPad

Reg A+ Funding

Regulation A+ is a type of offering where a private company is able to raise funds directly from the general public. A kind of IPO that doesn’t need or meet all the requirements of a formal IPO, which requires the investors to be accredited. These types of funding are meant for the smaller company or early stage business to raise up to 50 million dollars.

These types of funding are often followed up by additional, larger rounds of funding, which are subsequently called Reg B, C, and sometimes D funding.

Usually by the time a business gets to Reg D funding, investors are itching for a final product delivery, and a promise for some returns on their massive investments. By this stage, it is usually make or break for businesses to either push towards profitability or a selloff event in which investors can receive back compensation in return for their investment stake in the company. This can come in the form of being bought out, holding an initial public offering (IPO), or liquidating assets accumulated by the company over time.

Reg A+ funding is a great way for small businesses and startups to secure funding that is much needed in the process of developing their company. However, it is likely the best model for very specific businesses that have the opportunity for scalability and widespread national or global adoption, due to the need for returns to investors within a given timeframe, and the massive amount of funding that they put forward.

Business Funding Competitions – Techcrunch

Although shrouded in controversy, business funding competitions are a big part of TechCrunch’s culture. TechCrunch is an online magazine, and resource for all types and forms of business. This company has a well regarded contest for startups called Startup Battlefield. Startup Battlefield offers startups from around the world the chance to compete for the Disrupt Cup and $50,000.

With the exposure from media and investor firms the winners and even the runners up stand to gain ground in their funding efforts. There are many contests out there, many of them offering prizes from $10,000 – $50,000.

This type of funding for small businesses and startups is gaining widespread popularity around the world, and other business competitions are beginning to pop up as a result.  Not only do these competitions offer a way for business owners to secure funding, but they also offer an atmosphere of fun, knowledge and progress to entrepreneurs who want to change the world.  Even if you do not win the competition, these events can be great for networking and learning more about the business opportunities around you.

Some other business competitions that offer funding to business owners are:

  • Rice Business Plan Competition
  • Harvard Business Plan Competition
  • MIT $100K Entrepreneurship Competition
  • Tufts 100K Plan Competition
  • Duke Start-Up Challenge
  • New York StartUP! Business Plan Competition
  • 2017 U.Pitch Competition Competition & Showcase
  • Hello Tomorrow Challenge

Customer Financing (Advance Payments)

This is the type of funding sources companies like Apple have been using for years. They push the advertising, word of mouth, and the reputation of their past products to get customers to purchase products before they are made. Many car manufacturers such as Tesla also use this method to bring in clientele based on the desire to have a chance to be the first to have a new product line.

If you have a great existing customer base that believe in your vision, this can be a great way for business owners to secure funding. You want to be careful though, as not coming through on your promises can quickly lose customer trust and interest that took years to build.  It’s not exactly easy to win back either.

Crowdfunding

This method of raising capital has some very good results. GoFundMe is probably the most well known of the crowdfunding organizations. The website will tell you and also help you to advertise your need on social media, with family and friends. Ambitious entrepreneurs and successfully crowdfunded business managers will tell you, getting the link out onto websites of all types is the way to winning numbers on the bottomline.

Some other popular crowdfunding sites that business owners can use to secure financing are:

  • Kickstarter
  • Indiegogo
  • Patreon
  • Ulele
  • CircleUp
  • Rockethub
  • GoGetFunding
  • DonorsChoose
  • GiveCampus
  • Fundly

Venture Capital

Venture Capital is a form of funding where businesses are funded by a firm or bank that specifically lends money (usually millions) to businesses for a stake in the company.

This form of funding is not usually for the startup business venture. Not to say a good pitch can’t get you VC funding, it’s just that the investment banks that do this type of funding are more in the market for larger companies that they can take control of. Venture capital can be a very attractive alternative to businesses that have already been working a few years with existing revenues, proof of concept, and that have a strong projected earnings potential.

To the enterprise business owner, or startup managers, funding can be daunting and challenging. But with some background work, there can be a future for the company that would like to get off the ground and grow within its chosen market.

Securing Funding for Your Business or Startup

When it comes to securing funding for your business, there are many options available to you. Each has their own pros and cons which may make them better or worse for your business, depending on your existing business model.

Regardless of industry, there is always a form of funding for businesses that is a viable solution to your lack of capital. The best tip we can give before securing funding for your business is to make sure that you have done your research, and compared the various types of startup funding available to you in order to make the best decision.

November 21, 2018 / by / in
Comments

Comments are closed here.