So, you’re planning your dream startup and, after ironing out your ideas, processes, and goals, you know that cash infusion is needed to see those plans come to fruition. Every entrepreneur must learn the ropes at some point, and if you’ve never experienced raising capital before, there’s no better time to do so than when you need the money most.
Few entrepreneurs can be successful without a substantial nest egg to help launch themselves into business. Here, we take a look at the various methods of raising capital to get startups off the ground.
DETERMINE YOUR VALUE
Before you approach anyone, determine the value of your company. A company’s value is important to know because it acts as the basis for determining the cost of new capital. Simply put, a company with a $1 million valuation and zero debt asking for $1 million in new capital is worth $2 million after investment. Basic value can be divided so that the original owners would own 50% of the new $2 million company, while the new investors would also own 50% interest for their contribution of $1 million cash. The division is determined by considering what the startup is valued at currently and what it could be worth in the future. Business valuation is subjective depending on the perspective of the valuator.
The most common source of startup capital is funding your own business. Although self-funding can be in the form of credit card advances, home equity loans, and private loans, these come with high interest rates that could be detrimental to your personal credit history in the long run. Canadian government funding options should be the first route you look into, such as sponsored grants available for entrepreneurs. The Canadian Business Network has detailed information on financing options available, including cash advances, contributions, subsidies, and tax refunds.
Family and friends are usually the first group to be reached out to by business owners seeking capital. They are ideal because they tend to be less discriminating than professional investors and more likely to invest due to your relationship than the economics of the enterprise proposal. Be aware that family investors bring with them their own set of problems, including the possibility of hurt feelings and resentment if the investment fails.
Another option available is to seek capital from private sources such as commercial and investment banks or groups seeking investment opportunities such as wealthy individuals or venture capitalists. In these instances, funding is commonly given in the form of debt, equity, or a combination of both.
- Debt. The simplest and most frequent method startup capital is secured; a debt agreement secures assets of the company by way of a personal guarantee from the owners. Once your company begins to reap profit, repayment on principal with interest is made. In the event the business fails, lenders will foreclose and liquidate to recoup their investments, possibly even seeking any deficiencies from you personally. Interest rates for borrowing money is high because it allows you to maintain complete ownership.
- Equity. In this case, investors become owners of the business with alongside you. The amount of ownership varies depending on the negotiation and is based on the agreed-upon value of the company. The total amount of money raised is a compromise based on the eagerness of the venture capitalist and the keeness of the startup team seeking for cash.
Crowdfunding sources such as Kickstarter and GoFundMe may be an option to get your business off the ground. They allow entrepreneurs to reach new money sources effectively and inexpensively. The platforms let you pitch business ideas to a large number of people who make small investments – collectively working toward a target goal. In 2014 alone, over 22,252 projects were succesfully funded on Kickstarter, with a total of $529 million pledged. Check out some of the most lucrative proposals here.
It’s in your best interest to avoid asking for capital infusions from non-affiliated third parties until you can prove your business concept and show revenues. Investors typically require entrepreneurs to show their worth before they are willing to invest money, and prefer you’ve made progress toward implementing your business plan.
Financing professionals claim that the process of raising capital for a new venture ensures that only the companies most likely to succeed receive funding. Persistence and the willingness to learn from rejection without losing enthusiasm will both humble and strengthen your business acumen.