Let’s face it…in theory, starting a business with no money might be possible but you’re much more likely to succeed if you can raise capital.
Back when I first applied to business school I was informed that we would be creating a business plan throughout the program and would have the opportunity to have it critiqued over and over again by some of the brightest business minds around.
Of course, as an entrepreneur, the light bulb flashed above my head; I would create a business plan for an Internet startup, have it perfected while in school, and then convince potential investors to give me money to launch the plan.
Easy as that, right? …wrong.
The truth is, my initial attempt to raise capital wasn’t even close to being successful. …I was so far off it wasn’t even funny.
Here’s what I learned about the funding process and persuading potential investors.
You need more than just a good business plan
It’s a hard pill to swallow but it’s true …nobody really cares about your business idea.
As you tell people about your startup idea they may genuinely like your idea and will probably say things like “oh! That’s a great idea!“. However, ask them to give you some money and they’re probably going to tell you to get lost.
The same is true when trying to raise capital; you can have the best business idea in the world but, if you don’t have a growing list of clients, you’re just not going to get any funding.
This is what happened in my case; I had an incredibly profitable business idea, backed by a masterfully crafted business plan. The problem, however, was that I didn’t actually have any paying clients to prove that my research was accurate.
In other words, even though I had every other piece to the puzzle, no investor was willing to give me funding because I didn’t have physical proof that people were willing to buy what I was selling.
Of course, that doesn’t mean you shouldn’t put effort into pre-launch planning. The challenge, however, is to speed up the pre-launch planning process and to minimize mistakes as much as possible so you can move through the funding process quickly.
A smart man once introduced me to the business model canvas.
Before you go all out creating a business plan, start with the business model canvas approach to make sure that you have a sound business idea. This will save you a lot of time in the long run and will help you to stay away from potentially bad business ideas.
Once you understand how your business is going to work, you then need to hammer out the details and crunch the numbers.
This is going to be incredibly tedious and is, unfortunately, where most people will make mistakes that cost them big in the long run. I strongly suggest that you purchase a business planning software like Live Plan and think from the viewpoint of potential investors.
As you crunch the numbers, consider questions like the following:
- What’s the expected return on investment?
- Does the expected return justify the investment?
- What offer would entice potential investors the most? How much of an equity stake is appropriate?
- Does your management team have the necessary skill sets? Can you prove the capabilities of your management team?
- How are you paying your management team? Are you offering your management team an equity stake as well? Does the expected return motivate your management team or are they motivated by something besides the equity stake?
This is going to cost you a little money and time but, trust me, it’s worth every penny.
Once you’ve completed your business plan, you need to have knowledgable people critique it for you.
This was one of the perks of going through business school; I had more than twenty very qualified professors rip apart my idea and business strategy. While this was a great starting point, the advice I got from my professors was nothing compared to the critique I got from potential investors.
For the best advice, put your plan in front of someone who is considering giving you money; they won’t miss a thing.
Of course, if you’re not going through business school, this may not be a realistic way to get your business plan critiqued.
One way to get in front of people who may be willing to help you is to connect with them on the social networks. Before you ask them to help you, though, add them to a “list” and interact with them in a way that is meaningful.
Your first move needs to be realistic
The problem with the plan I originally created was that it was way too big.
I thought that if I could create a good enough plan and align all of the pieces, I would be successful at raising venture capital.
The truth is, it just doesn’t work like that. Raising venture capital is for fast growing companies who have already made a lot of progress. Think about it; it doesn’t matter if your idea claims to cure cancer, no one is going to give you a couple million dollars to test that idea. It’s just too risky and you have nothing to offer as collateral.
The best way to raise capital is to think about it as a process; an on-going process that helps your business get to the next level. In other words, you secure capital funding in order to finance the growth of your company.
As you can see, raising venture capital is for the big dogs.
If you want to get to the point where raising venture capital is even a realistic option, you need to know how to maneuver through the capital funding process. Here is what you need to focus on:
- How to grow your business at the next level – Before you go ask potential investors for money, you first need to know how to grow your business at the next level. In other words, how are you going to use the capital funding to make your investors money once you get it? This goes back to creating a business plan. At each stage, you are going to need to create a business plan for your investors.
- The right investors at the right time – Once you know exactly how to grow your business at the next level, you then have to find the potential investors who are right for the job. The ‘right’ investors will be those who bring characteristics to the table that make up for your company’s weaknesses. Likewise, it’s incredibly important that you be very careful with the timing of investment.
It takes money to raise money
Unless you’ve made exceptional progress in every other area of your business, you just aren’t going to receive capital funding without having paying customers first.
I know, it’s a catch-22.
The truth is, you’re going to have to figure out how to start a business with no money.
While there are certainly quite a few different approaches to funding your idea, the less risky approach would be to do something like this:
- Have a normal job – Unless you plan to raise capital from somewhere else, you’re going to have to fund your idea yourself. This means that you’ll need to have a steady job to do so.
- Start a side business – The next step would be to start a side business that is subscription based. In other words, you need a side business that continually generates monthly recurring revenue for you to build from.
- Outsource everything – Next, outsource all of the work to subcontractors. If you find yourself needing to complete one time projects, consider using crowdsourcing websites like Elance or CrowdSource to get things done.
- Automate everything – At the same time, find a way to streamline your business operations. Move everything that you can to the cloud so that you can get rid of any extra waste.
- Transition over – Once your business has organically generated enough recurring revenue, you can then transition yourself into your business full time.
Of course, organically growing a business on the side is going to take an incredibly long time and it may not be a realistic option for everyone. The good thing is, there are plenty of other ways that you can try to raise capital for your idea. For example, an emerging way to raise capital online is through different platforms that source crowdfunding for startups.
Crowdfunding for startups has, until recently, been halted by laws and regulations. However, with the pass of the Crowdfund Act, you can now raise capital online through crowdfunding platforms like Crowdfunder. Crowdfunder, essentially, makes it very easy for you raise capital online by getting your startup idea infront of a wide range of potential investors.
The great thing about Crowdfunder is that they are wanting to allow entrepreneurs to offer an equity stake in their startup as a way to raise capital.
My guess is that the ability to offer an equity stake in exchange for capital funding would greatly increase the number of entrepreneurs who actually move forward with their startup idea.
Another great resource for sourcing crowdfunding for startups is the GoBigNetwork. One of the best things about this particular resource is that they walk you through, step by step, what you need to do to increase you chances for securing capital funding.
Of course, there are also crowfunding platforms like Kickstarter that allow you to raise capital online for “creative projects”.
The main difference between platforms like Crowdfunder and Kickstarter is that Crowdfunder allows investors to get a return on their investment, whereas Kickstarter simply allows you to collect donations.
Conclusion
Take it from me, when it comes to convincing potential investors to give you capital funding, you’re in for an uphill battle. The hardest part of the funding process is actually getting the ball moving and picking up momentum for your startup.
It’s not impossible, but it is incredibly difficult.
Whether you raise capital online or secure capital funding through some other means, you need to be scrappy and figure out how to make things happen.
For those of you who have successfully bootstrapped a business or secured startup funds for your business, what worked and what didn’t?
What are some insights into the funding process that you can provide?