What Have I Done?
Facing the Financial Realities of Being an Entrepreneur
“It’s almost always harder to raise capital than you thought it would be, and it always takes longer. So plan for that.” Richard Harroch
Welcome back to the DE Blog! This week in honor of Entrepreneurship Week we’re bringing you blog posts that highlight important aspects of being an entrepreneur. Today, in Part 3 of our Entrepreneurship Week Series, we discuss the financial realities of entrepreneurship in “What Have I Done?”
Once you’ve generated an idea for a business and jumped through the legal hoops to create it, you must then wrestle with one of the hardest aspects of running a small business: funding. Many aspiring entrepreneurs have an idea for their business but lack the capital to actually start it. If you don’t have money to buy materials, lease office space, or hire staff, then it’s impossible to run a business. Furthermore, once you’ve decided to do this full time, your concerns aren’t just about balancing your company’s budget, but also your household budget as well, which can be challenging. So, what are your options for funding your dreams and your company? Here are a few.
Friends & Family
Often, the first check for your small business or startup will come from a friend or family member. Although, this should be your second check since your own check should be the company’s first investment. It’s tough to ask others to fund your dreams when you don’t have any skin in the game. While, theoretically, it’s a lot easier to ask those closest to you for help with funding your business, think long and hard before you make the ask. In practice, the responsibility of making sure that your parents or childhood best friend at least breaks even on this risky endeavor (statistically speaking) is a lot of pressure and makes for some pretty awkward holiday conversations in the future.
Most people’s concept of funding a business is through traditional bank loans. However, it is incredibly difficult for most entrepreneurs to secure bank loans because banks typically aren’t interested in unproven businesses. To secure one, you may be asked to put up personal assets as collateral and we encourage you to consider the consequences of leveraging your house or baseball card collection to start your company, especially since, per the Small Business Administration, 50% of businesses fail during their first year in business.
Grants are often overlooked and underutilized as a startup funding source. Businesses focused on science, research and tech may be able to receive grants from the government and non-profits. The Small Business Administration (SBA) offers grants through the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programs. Grant recipients must meet federal research and development goals and have a high potential for commercialization. Additionally, if you’re a social entrepreneur, there are also some philanthropic organizations that may be interested in funding your endeavor.
An angel investor is an individual who invests his or her own money, in early-stage or startup companies, in exchange for a 20 to 25 percent return on his/her investment. They have helped to start many prominent companies, including Google and Costco. If you can find an angel investor interested in investing in your business, this may be your best option as they often have strategic experience and can provide tactical benefits to the companies in which they are investing.
Crowdfunding is the practice of funding a project or venture by raising money from many people, most often online, instead of having to look for a single investment. Make sure to read the fine print of different crowdfunding sites before making your choice, as some sites have payment-processing fees, or require businesses to raise their full stated goal to keep any of the money raised.
Venture capitalists represent the most glamourous and appealing form of financing to many entrepreneurs as they are known for backing companies that are considered to have both high-growth and high-risk potential. They generally focus on specific industries and can, therefore, offer advice to entrepreneurs on whether the product will be successful and what steps need to be taken to bring the product to market. One of the drawbacks is that VCs are known for having a short leash when it comes to recovering their investment (usually within 3-5 years).
If the idea you’re trying to fund isn’t the cure for cancer, the design for a flying car, or the next great social media platform, it may be difficult for you to secure funding at the outset. You may need to pursue bootstrapping, which can take the form of utilizing savings, leveraging investments and property, or starting out part-time before making the leap full time into entrepreneurship. The common thread is that you’re acutely mindful of expenditures, revenue and profit and that you scale judiciously.
We could have written an entire book on funding, its importance and the myriad of funding options you have for your business. However, ain’t nobody got time for that. It’s very common to run of money before your company makes their big break, so careful planning is important. Our advice: do the research, consult your bank and give us a call if you want/need more information. Come back tomorrow for Part 4 of our Entrepreneurship Week Series: Growing Pains.