There are a lot of avenues for the intrepid entrepreneur to explore when seeking start-up financing for a small business. Bank loans are the most common, but you might also look into personal loans (from friends and family), a self-directed Roth IRA (financing your business through retirement funds), angel investors, and even business partners. And of course, venture capital is another possible option. If you’re having trouble securing a loan for your business in these uncertain times, but you’ve put in the time and effort to formulate a solid business plan (including market research, focus groups, maybe even the creation of a prototype) or even if you’ve already launched your business but you need money for expansion, then venture capital might be a good way to move forward. However, you’re going to have to overcome some myths before you do.
- Finding the right investors is easy. Finding investors is in no way easy, and finding the right ones is even more difficult. Not only do you need to shop around for venture capital firms that are interested in what you have to offer and have a history of supporting your type of business (industry, stage of development, etc.), but you must find ones that are a good fit with your personality and goals. There are a lot of factors to consider and you’re simply never going to find someone that is a perfect fit, so prepare to settle.
- You don’t need to invest. Sorry, but nobody is going to invest with you if you aren’t carrying at least some of the risk. Even if you don’t have as much money to invest as a venture capital firm, they need to see that you’re willing to put something on the line before they’ll even think of giving you money to play with. A person who stands to lose something (or everything) is going to work that much harder to ensure success. And if you’re unwilling to put money into your own idea, you shouldn’t expect others to do so.
- A good idea is enough to secure funding. Wrong again; venture capitalists are in this business to make money, so you’re going to need more than a cool idea to interest them in investing with your company. Even beyond evaluating the marketplace to determine whether or not you can earn money with your business, you have to realize that these companies are getting hit up for money all the time. So if you don’t approach them with something that either has proven success elsewhere or is so brilliant that anyone can see it will take off (and the latter is pretty unlikely), you shouldn’t be surprised to get politely ushered out the door.
- You’ll hold the majority stake. You might think that just because you came up with the concept and did all the leg work up to this point you’ll be able to keep the majority of your money, but you’re asking someone else to put their money into your hands, and they’re not going to do so without something in return. That something is anywhere from 55-70% of your earnings. Ouch.
- You can retain control. Not very likely. Most venture capitalists consider that they are investing in your company with you, and they therefor become not-so-silent partners that will do whatever it takes to get their money back (and more), even if that means telling you what to do (or calling in the money you owe them). Plus, most contracts have a veto clause written in to protect the rights of the investors (leaving you out in the cold…and the important decisions for your company in the hands of others). In short, you could be making the proverbial deal with the devil.
Sarah Danielson writes for Granite Card where you can find articles on all things credit related, including bad credit cards with high interest rates and hidden fees.