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Funding Strategies for New Businesses

Funding Strategies for New Businesses

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After the rush of figuring out a new idea for your business and pulling together a team to run it, one challenge faces all entrepreneurs. They must find the necessary financial resources. For some, the ‘money hunt’ can come to dominate their activities. Others find solutions that allow them to at least launch the business. Many companies founder because the team never figures out how to meet this challenge. How you meet this need is one of the most important steps in determining if your company is at least going to have the chance to succeed.
After the rush of figuring out a new idea for your business and pulling together a team to run it, one challenge faces all entrepreneurs. They must find the necessary financial resources. For some, the ‘money hunt’ can come to dominate their activities. Others find solutions that allow them to at least launch the business. Many companies founder because the team never figures out how to meet this challenge. How you meet this need is one of the most important steps in determining if your company is at least going to have the chance to succeed.

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Published by: Dr. Earl R. Smith II on Dec 18, 2009
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Funding Strategies for New Businesses
Dr. Earl R. Smith II
DrSmith@Dr-Smith.comwww.Dr-Smith.comAfter the rush of figuring out a new idea for your business and pullingtogether a team to run it, one challenge faces all entrepreneurs. They mustfind the necessary financial resources. For some, the ‘money hunt’ can cometo dominate their activities. Others find solutions that allow them to at leastlaunch the business. Many companies founder because the team neverfigures out how to meet this challenge. How you meet this need is one of themost important steps in determining if your company is at least going tohave the chance to succeed.
Early-Stage Funding Options
One of the principal reasons that founders find suchdifficulty in meeting this funding challenge is that they tryto skip stages in the process. Many of them try to raisefunds far in excess of the levels that their current situationmerits. Investors make a distinction between a businessbuilder and a lazy entrepreneur. The latter generally has apoorly written business plan or a vague idea for a businessand approached them looking for five or ten million dollarsto their ‘idea’. The former has shown prudence, professionalism and a senseof proportion in their efforts. One get serious attention while the other is thebutt of jokes.For a very early stage company, true funding requirements may extend onlyto filling the need to perfect the value proposition and develop a prototype.During this ‘projectstage, there is no clear demonstration that theunderlying value proposition can be monetized. There are no customers whohave indicated, through their purchases, that what the company is offering isworth the projected cost. At this stage, entrepreneurs need to tap the three‘Fs’ to meet these needs; friends, family and fools. Approaches to othersources will, for the most part, result in a waste of time and energy with littleprospect of success.Good entrepreneurs understand that they have to develop their company toa certain stage before either angel investors or venture capitalists will giveserious consideration to funding it. But the challenge remains. Even the
 
three ‘Fs’ may not be enough to get it to that stage. At this point, foundersneed to become very creative in their approach. There are many other,early-stage sources that can be tapped. Here are just a few of them:
SBIR and STTR Funding:
For certain companies, government fundingis a real possibility. These programs offer money for development of prototypes and even simply proof of concept. In fact, stage one of theSBIR program is exactly that. In return for the right to use the results,almost every government agency will fund such proof of concepts inareas that they are interested and for problems that they need solved.Stage two of these programs offer follow-on funding for furtherdevelopment. The company retains the developed intellectual propertywith only the above restrictions.
Potential Customers:
This approach is a first, major test of the valueproposition that the company is promoting. The logic is, ‘if yourproduct or service is as valuable as you think it is, your potentialcustomers should have an interest in its development’. Manycompanies have been launched using this approach and never had togo the further step of raising venture capital. There are additionalbenefits of this approach. First, you get to test your ideas in the realworld. Second, your potential customers will help you refine your valueproposition. Third, they will help you expand your pool of potentialcustomers through referrals and references.
 Joint Ventures:
Another option is to find a well established companyto partner with. Although there are dangers involved such as keepingcontrol of the intellectual property, many companies have successfullymanaged this risk and tapped into significant financial resources. Jointventures are particularly relevant for high-technology companies thathave either cutting edge or disruptive technologies.
Grants:
There are organizations and associations which are dedicatedto supporting the development of certain technologies. Many of theseprovide development grants to emerging companies. Although theamounts may be small, the restrictions on the use of proceeds aregenerally few. Some companies have accessed a fairly regular streamof these grants to support development of new innovations orfunctionality.
Bootstrapping:
Sweat equity is defined as the time and effort that ateam invests in getting a business to the stage where investors will be
 
interested. This means taking it beyond the ‘business plan’ stage bysheer force of will and dedication. It may mean that founders will haveto go without a paycheck for some time or that they will make barterarrangements that will give them access to the resources they need. They may have to take out a mortgage on their house or invest theirsavings. Such bootstrapping demonstrates a determination to succeedthat extends well beyond verbal statements of commitment.
Business Plan Competitions:
Many universities and associationsorganize business plan competitions. The prize is often funding in theform of a grant or award. These competitions have a number of benefits. The first is that they force the team to finely hone their valueproposition and translate it into a professionally drawn business plan. Asecond is that it brings the team into contact with other, competingteams. This gives them direct experience with the dedication,resourcefulness and professionalism of other teams. A third benefit isthat the competition is generally judged by people very experienced inthe start-up game. Some may be investors who will take the time tohelp the team perfect its business plan and value proposition.
Micro-loans:
There are financial organizations that specialize inmaking small loans to start-up companies. They are specialized banks. The loans are generally small but can be very useful in developingprototypes or bringing key team members on board. For the most part,these organizations recognize that they are making relatively high-riskloans. Their purpose is to support entrepreneurial activity. These and other funding sources can be very useful in getting a companythrough the early-stage. The objective of the founders should be to use themto develop the product or service to the point that the company will be of interest to investors who will look at it from a return on investmentperspective. Investors will require a clear demonstration that the valueproposition can be monetized and that the team is capable of managing thatmonetization. They will also look for indications that the team is very good atgetting the most out of limited financial resources. Once a company gets tothis stage, they are ready to start the hunt for larger amounts of funding. They have a number of options.
Funding a Going Concern

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