Financing the Launch of Your Company
Bill Warner Tuesday, June 16, 2009
Once you have gotten your company through the proof of concept stage and are now at the point that you have a product or service ready for market, you will need to finance this phase of your company’s growth.
Many of the alternatives that were considered for the seed financing of your company can play a role in this stage of financing as well. The additional alternatives to consider for this stage of financing are:
- Bootstrapping
- Strategic Partnerships
- Customer Partnerships
- Angel investors
Let’s take each of these and explain the purpose and implications.
Bootstrapping
Many businesses are suitable for this form of financing, especially services businesses. This can be accomplished when you have plenty of time to get to market and you don’t have to spend a lot of capital to acquire and service a customer. It is very difficult for product companies to bootstrap themselves when there is a need for funds to pay for capital equipment and inventory.
This means that you do not have to sell any ownership in your company but your growth will be strictly determined by the speed with which you can acquire paying customers and execute the services.
At the end of the day, you will own most of your company and reap most of the rewards upon exit.
Strategic Partnerships
Often your business may have interest from major corporations who have funds available for partnerships with companies who will offer products or services that are a complement to theirs.
Think through how your products or services could be complementary to such companies and contact them to set up a briefing about your business idea. You want this meeting to lead to discussions about how the strategic partner could possibly provide seed funding for consideration of future royalties or other preferred financial returns.
These companies are not banks, so they will want to have a significant return for their time and money, but it will mean that you have a lot of influence with future investors when you have a big partner on your side. You will also have the potential of not having to sell part of your company to the strategic partner.
Customer Partnerships
When you are solving a burning problem that some big companies have, you may find an opportunity for a potential customer to finance the growth of your company for consideration of future preferential pricing and other financial returns.
Just as you would with a potential strategic partner, approach these companies with your business plan with the intent of allowing them to share in your future financial success.
In these relationships, you will have to find your way through exclusivity considerations as well as intellectual property ownership, but sometimes these arrangements can be very successful.
Angel Investors
Angels are not what they used to be. There are always exceptions, but for the most part, sophisticated angel investors will participate in financing a company at this stage, not before.
Get yourself completely ready with your business plan and financing story to approach angel investor organizations in your geographic area. Do the research to understand their interests and find people that can refer you to the executives that run these organizations. A personal introduction will get you a lot further.
Be prepared for a rather formal presentation and due diligence process, along with the resulting formal terms that will describe their investment in your company. This is very expensive money, but may be the only alternative you have for gaining the financing you need.
View the angels more like partners with whom you will have a long term business relationship. They will want to provide you assistance without disrupting your operating of the company. Use the talent and contacts they can provide to help you get successfully launched.
What about VC’s?
Again, there are always exceptions, but institutional investors will not participate in this stage of financing unless they see the opportunity to ultimately place over $5 million in your company and have an incredibly high degree of confidence in your management team and your ability to get some rapid sales traction. So, spending your time approaching VC’s at this stage will probably not be fruitful, but will put you on their radar screen for approaching them in the future, once you are at a level of maturity they are interested in.
Summary
This stage of funding could be as small as a few hundred thousand dollars. On the other hand, this stage of funding could be quite large, up to $2-$3 million in some cases. So, it will sometimes take large pockets to come up with the financing you need to launch your business. Whatever the amount being raised, this stage of funding takes even more time to accomplish and the need for a well thought out business plan and financing strategy is essential to your success.
Filed Under: Angel Investment, Financing a Company, Business Strategy and Planning
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Bill Warner is the Managing Partner of Paladin and Associates, a business consulting firm in the Research Triangle Park area of central North Carolina, and is the Chairman of the Triangle Accredited Capital Forum, an angel investor network with over one hundred members throughout the southeast.
Excellent writing Bill. Only thing I would like to comment on is the “spending your time approaching VC’s at this stage will probably not be fruitful”. You are correct when it comes to raising capital, but the fruits come in the form of the VCs telling you what may be wrong with your model or things that you should be focusing on. Entrepreneurs can turn the VC process into a positive light as opposed to becoming disenchanted when they do not raise capital. Other people’s time and constructive comments can help. I have raised capital from 5 angel investors and have been preparing since inception for my first round of capital from VCs. It’s grueling, but I have always had my eye on how to prepare to find the right partner.
Great information Bill, as always. One other area for the startup company to consider is the Small Business Administration or SBA financing route. Given the recent legislation passed by the current administration, this might be a very attractive alternative where the entrepreneur does not have to give up any equity to get anything from a few hundred thousand to a couple of million. As long as they can demonstrate a 1.25 debt service coverage capability (after expenses available cash flow of 1.25 times the monthly payment for a 10 year note of the total financed) they should have no problem qualifying.
