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Entrepreneurs Look for Outside Funding Options- Tips 2 Know
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The recent unemployment rate is projected to hover at 10% until 2012. With so many people out of work, fostering entrepreneurship and small business growth becomes even more important and necessary for New Jersey and our country.
The number one obstacle most entrepreneurs face is lack of capital funds. The following are some money-ask information and tips for entrepreneurs and small business owners, including some important factors Angel Investors, Venture Capitalists and lending institutions consider when evaluating a potential business investment.
Write Down Your Business Plan, (A Long Version & A Summary Version)
Business plans can be laborious, but an important step. When pitching, a five to ten page business plan summary is an important document to have ready. Summing up what you want to do, how you will do it and what you will apply the money toward gives credence and adds to the success rate of securing outside funds.
The summary needs to provide important disclosures, key challenges, the risks, the competition, plus give your backers knowledge as to where their money is going toward. An absolute must is describing the management team. In brief detail, provide your professional career experience and skills plus the management team that will be leading the business. Outside funders, including banks, need assurance that their money will be used to grow a business that is run by competent leaders.
Determine a Funding Strategy- Include Friends & Family
Most investors want to know how much money you have personally put into the company and if you have exhausted your circle of family and friends. Some investors view this piece of information as an indicator to your commitment and your view of success toward the business.
• When reaching out to connections, including family and friends, important information to note:
• Typically, only 10% to 20% percent of people asked will contribute.
• Smaller amounts of money requested have a higher probability of success. It is easier to ask and to give $100 versus $1000, regardless of how much love exists in the relationship. If a website costs $5000, based upon the 10% – 20% success rate, you will need to ask 250 to 500 people to find 50 people willing to contribute $100 each.
• Loans have to be paid back on time, which can have an impact on cash flow and profitability.
• If family or friends give a ‘gift,’ follow it up immediately with a thank-you note for the monetary gift and refer to the money as a ‘gift’ in the note.
• Consider trying websites such as 40billion, Caplinked or LendingKarma to help you structure, document and manage investments from friends and family.
• Whether it’s family, friends or an outside investor, if equity is involved with the funding strategy, we strongly recommend hiring a lawyer and a financial advisor who are experienced with private equity transactions.
• Manage expectations of the business on a consistent manner with all investors. I know of several friendships that went south due to lack of communication over business investments. Even bad news is better served openly than not at all. An upside of bringing in friends and family is that they are typically more patient than outside investors.
If going the investor route, usually you will have to give up a portion of the business, (equity) and perhaps place the investor as a member of the management team or the Board. A piece of the business,(equity) in exchange for the financial investment can mean paying quarterly or year-end dividends, buying back shares, or selling the business; thus Return On Investment, (ROI). Even friends and family want a return on investment. These terms and conditions need to be pre-determined prior to accepting the funds and mutually agreed upon by all parties; thus, the need for an experienced attorney and financial advisor.
Looking for help with your Business Plan, we strongly recommend the following organizations: IFEL and UCEDC, and the following are in NJ and national organizations; SCORE and SBDC.
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