There are thousands of blog posts and thought pieces offering advice on “the most important part of any business.” And they all come to different conclusions about where you should focus your efforts. But the ugly reality of running a business is that the most important thing is actually pretty obvious: money. Money is the thing that keeps the gears of any business turning and more businesses fail due to cash flow problems than any other type of business failure. There are lots of options for finding the money to start and grow your business but before you start searching for venture capital, read on to learn about better options for finding the money you need.
Finding the money
I’m deeply involved in the startup ecosystem and have been for over 10 years; both managing a startup, advising startups, and judging startup competitions. Nearly every startup thinks they need to find venture capital to get their business off the ground and to continue business growth. But, there are serious downsides to taking venture capital, especially early in your business. In fact, many startup experts blame the failure of startups on having too much money, rather than too little, according to American Express. Among the problems generated when a firm has too much money from investors is sloppy management, the lack of thoughtful business analysis, and reliance on proven methods and experts rather than using out-of-the-box thinking that results in true innovation.
Taking venture capital comes with its own problems. For instance, venture capitalists expect a return on their investment, and they want a clear exit strategy so they get their money back quickly to reinvest in another startup. The problem with this strategy is two-fold. You give up partial ownership of your business and that often comes with a loss of control. Your venture capital firm wants to put their own people on your board, which limits your ability to determine the direction of your business plus it reduces your nimbleness. Another problem with accommodating a venture capitalist is they want a short-term investment and that’s often not in the best long-term interest of your business.
Plus, many startup owners spend so much time looking for scare venture capital that they ignore all the other activities necessary to get their business off the ground.
Instead of automatically looking for venture capital, here are some alternatives for finding the money.
Sales
Face it. You’re in business to sell products (both goods and services) to customers. If you can’t entice customers to buy your product, then investors probably aren’t interested in jumping into bed with your business. Besides, when you sell products, you don’t owe anyone anything; making revenue the cheapest money around. If customers really don’t see value in your product, then finding out early before wasting a lot of time and money on your venture is great.
Sales don’t just happen out of thin air, so generating revenue requires a well-constructed marketing plan that’s implemented effectively.
Self-funding
Don’t ignore the opportunity for self-funding your venture. This doesn’t mean you have to max out your credit cards, however. You might consider finding the money by keeping your “day job” while you build your business as a side hustle or working in the gig economy to supplement your financial needs while you get your new venture off the ground. That way, you don’t require a salary in the early stage before you reach revenue positive and you may even have a few dollars to invest in building your company.
Debt financing
Debt is a scary thing for anyone but it’s often an inevitable part of running a business. Whether it’s technical debt, investors expecting a return, or simply paying back a business loan, debt is often difficult to deal with since banks and other sources of money don’t take kindly to late payment. The key is to make sure that you’re not hiding your head in the sand and that you’re facing it head-on. Whether that’s through discussing cost-saving measures or by getting in touch with an organization measuring technical debt, finding the right advice and guidance is always crucial. That way, you’re going to be able to stay on top of your debts rather than getting buried in them.
Friends and family financing
Friends and family financing is a tried and true method for finding the money to fund your startup. And, there are lots of options for raising money from them. For instance, you can go to a crowdfunding source, such as Kickstarter. The programs that do best on crowdfunding sites are unique products where investors are really making an advance payment with the promise of getting the product first once it’s available and products that support community values.
Another way to raise money from friends and family is through asking for investments from folks you know. In the past, issuing stock to small investors was severely limited through regulations from the Securities and Exchange Commission (SEC) as a tool to protect investors. Recently, the SEC relaxed those regulations to make it easier to raise money from small investors with less paperwork.
Partnering
Another option for finding the money you need to help your business grow is by partnering with individuals or another firm. In addition to providing necessary funds, partnerships offer other benefits, such as bringing in the expertise necessary to make your venture successful.
Planning for the future
If you’re not carefully considering the future of your business, you’re never going to make the most of it in the present. This is true for every aspect of your business but is especially true for your finances. You must develop realistic financial projections and keep them as up-to-date as possible. Starting with a sales forecast, you should develop a budget and monitor your performance against that budget to detect variances early on so you can accommodate them. Variances also help you get better at building forecasts over time.
Now, this is not to say that you should exclusively focus on the finances in your business at the expense of everything else. It takes a lot more than money to get your business off the ground or help it grow, so it’s obviously incredibly foolish and short-sighted to focus all your attention on finances. However, it’s essential that you keep your business’s finances in mind at all times and allow that knowledge to influence all the other decisions that you make. Otherwise, you could wind up in a situation where you have everything in place for a truly fantastic business other than the actual funds to turn it into a tangible reality.
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