Entrepreneurial ventures are constantly in the market for new capital. Experienced entrepreneurs realize that the financing of companies is done in stages and that they have to be flexible in identifying the latest trends in financing.
For many startup entrepreneurs, initial financing can be the hardest part of launching their new business. It is a popular misconception that an idea, a startup team, and a preliminary business plan will get them in the venture capitalist door. They expect to exit, happily, with the check in hand.
Unfortunately, traditional venture capital, i.e. funds supported by institutional investors, only finances a fraction of the new companies started each year. Over 90 percent of startup money comes from private sources and it is up to the individual entrepreneur to identify and sell their project to these financing sources.
Begin With a Business Plan
Whether you need to raise money or not, any prospective venture should begin with a business plan. This should include:
– Purpose and Objectives–a summary of the what and why of the project.
– Proposed Financing–the amount of money you’ll need from the beginning to the maturity of the project proposed, how the proceeds will be used, how you plan to structure the financing, and why the amount designated is required.
– Marketing–a description of the market segment you’ve got or plan to get, the competition, the characteristics of the market, and your plans (with costs) for getting or holding the market segment you’re aiming at.
– History of the Firm–a summary of significant financial and organizational milestones, description of employees and employee relations, explanations of banking relationships, recounting of major services or products your firm has offered during its existence, and the like.
– Description of the Product or Service–a full description of the product (process) or service offered by the firm and the costs associated with it in detail.
– Financial Statements–both for the past few years and pro forma projections (balance sheets, income statements, and cash flows) for the next 3-5 years, showing the effect anticipated if the project is undertaken and if the financing is secured. (This should include an analysis of key variables affecting financial performance, showing what could happen if the projected level of revenue is not attained.)
– Capitalization–a list of shareholders, how much is invested to date, and in what form (equity/debt).
– Biographical Sketches–the work histories and qualifications of key owners/employees.
– Principal Suppliers and Customers
– Problems Anticipated and Other Pertinent Information–a candid discussion of any contingent liabilities, pending litigation, tax or patent difficulties, and any other contingencies that might affect the project you’re proposing.
– Advantages–a discussion of what’s special about your product, service, marketing plans or channels that gives your project unique leverage.
– Provisions of the Investment Proposal-State the financial offer precisely. For a loan, state what interest rate you are willing to pay, and whether on a monthly, quarterly or annual basis. For investors, are you offering a certain percentage of the profits, a percentage of business ownership, a seat on your board of directors?
Venture investors are usually quite familiar with “high risk” proposals, yet they all want to minimize that risk as much as possible. Include a listing of your business and personal assets with documentation. In most cases, if you’ve got a good idea and you’ve done your homework properly, an interested investor will buy in.
By John Hester