Funding is needed to fuel the growth of your business.
If cash flow is not sufficient to finance growth, there
are a number of financing choices.
The financing choices have pros & cons. The choice of financing
directly impacts your “control” of the business
and your personal life.
1. Bootstrap
If you choose to bootstrap (that means self-finance and
do things very cheaply) you can retain control of the business
and your personal life.
In reality, few technology entrepreneurs can afford to
finance the whole company themselves. The cost of prototyping,
market introduction, manufacturing, marketing etc. is beyond
the reach of most individuals.
Another approach to bootstrap technology to market is
to use licensing and strategic alliances. With this approach,
the technology entrepreneur joins forces with larger
companies that can handle the process of bringing a product
to market, including testing, support, marketing and
sales. This approach allows the entrepreneur to focus
on their technical work and avoid the need to “build an organization” with
all the costs and management responsibilities.
2. Friends & Family or Investors
Who Know You
If you choose to take money from friends and family or
people who know you and “believe in you and your idea”--
you can usually keep a significant amount of control over
the company. It is important to remember that these investments
come with “strings attached” and that even
friendly investors expect to be paid back. Such investors
may be patient and give you time to repay, but they will
be a presence in your business.
It’s important to carefully consider the overall
consequences of things going wrong before you take money
from friends and family. Damaging relationships with
family and friends can be a high price.
3. Loans
Banks loan money and want collateral (assets that they
can resell if you do not repay the loan). Bank financing
is usually not available to early stage companies unless
the entrepreneur has collateral (such as a home). One
entrepreneur told me that loans were the best kind of
financing because once the loans were repaid, the lender’s
control over the business ended. This entrepreneur was
willing to risk her home to maintain independence.
4. Angels, Venture Capitalists
"Angels" are high net worth (rich) individuals who invest
in companies. Venture Capitalists are investors who invest
other people's money in companies. These investors want
to make a significant profit from their investment. Venture
Capitalists generally want a BIG dollar payout and usually
quick (3-5 year) exit strategy; that is, an "IPO" (pubic
offering) or acquisition.
Equity investors want a continuing role in the business
because their
profit comes from the growth and success of the company.
Such investors can be great advisers or a source of great
frustration for the entrepreneur. The entrepreneur who
wants independence can find the investor oversight burdensome
and constraining.
What Kind of Financing Works for You?
When you consider pursuing your dream of growing a business,
I recommend that you think long and hard about your personal
goals. It’s important to also carefully consider potential
investors’ goals. There needs to be a good fit
for an effective relationship.
Having investors is kind of like having kids -- there
are many positives -- but there is a price to be paid
in your autonomy and independence. Independence is a
major driver for many entrepreneurs and this can be undermined
by the wrong choice of financing.
If you are a technologist and/or enjoy the creative part
of the business, you may be happier with bootstrapping.
A strong intellectual property plan (that is, protecting
your technology with patents, copyrights & trademarks)
and licensing your technology to others for commercialization
may be a better fit for your goals.
Jean D. Sifleet
Attorney & CPA
P.S. Feel free to forward eNews to colleagues who may
have an interest. While the material is copyright protected,
it may be distributed as long as it is forwarded in full
and the SmartFast source is identified.
|
