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How to raise the capital needed to launch your business

Today's entrepreneurs have more ways than ever to fund their business concepts. They just have to know what they need -- and what they are willing to give up -- to get it.

Here is a personal admission: I am not independently wealthy. If I were, this piece could just end here. Since I don't have deep coffers, I have set off down the funding road on more than a few occasions to seek capital for my businesses. And today, I'm happy to report, there are avenues for funding that have never been available before. Some even allow you to gain capital without giving up your potential revenues or ownership of the business. Let's get rolling.

Crowdfunding

Over the last couple of years, crowdfunding has been a great resource for raising capital. Services like GoFundMe, Kickstarter and Indigogo allow you to put forth a business concept to the general public and if people think it worthwhile, they can pledge any amount they want. There are important things to understand if you go this route.

The money you earn is yours to keep as long as you do what you say you are going to do. You don't give up any ownership of your business. And in some cases, you may find yourself with significantly more than you need. For example, entrepreneur Ryan Grepper needed $50,000 to launch the Coolest Cooler, a cooler tricked out with, among other features, a rechargeable blender, waterproof Bluetooth speaker and cutting board. The Kickstarter campaign ended up raising more than $13 million. Amazing, right? But here comes my first caveat, and it applies to all the funding options.

Before you choose your funding option, you will first need to decide on what you are willing to give up for what you need financially. And note, what you are willing to give up is rarely what investors are willing to take for their investment.

Your business concept needs to be well documented and accompanied by a pro-forma showing what you plan to spend and what returns on investment are possible. Based on the funding types you are seeking, you may need a lot more than a well-polished business plan.

Grebber's first Kickstarter campaign for the Coolest raised just over $100,000 of a $120,000 goal and then hit a roadblock. He relaunched the now-famous $50,000 campaign with a whole new marketing strategy, and the rest is history.

Private equity

Other than crowdfunding, private equity is where I look for capital more times than not. This boils down to pulling on your network of connections to find someone who has the capital to invest personally. I like this option because the people investing in my business concept have more skin in the game. They are more personally connected to the success -- and failure -- of your business. Often the percentage of investment raised from personal contacts is lower than with other options, and the investment amounts are not always as significant as those from other options. On the other hand, there may not be as many strings attached as with investments from big investors who require an ownership stake. So if you are looking for some seed money to get started or a few hundred thousand dollars to expand, then this may be the right path to take.

Venture capital

Typically, VC firms invest in well-polished ideas that are already in a state of launch or trying to hit much larger targets. Investments are in the millions and the ownership percentage expected is much higher. VC investors hedge their bets by investing in many different opportunities. They certainly care about their money, but they have much less at stake than a personal investor. Essentially, the firm is making the investment, not the members with direct personal equity. Something to note: More often than not, these groups are looking for an exit strategy. They would prefer to have short term, three-year investment tracks that lead to an acquisition by a much larger company; for example, the recent acquisitions of small but growing companies made by the likes of Facebook and Google. This is a VC's dream. So if you are looking to keep your company long-term, a VC firm may not be interested.

Angel investments

Think of this option as a hybrid between private equity and VC. An angel group typically comprises a network of personal investors who share their research and business opportunities. It is still their personal equity that they are putting forth, yet they can pool their finances and therefore lower the individual risk. Angel groups are usually city-by-city or regionalized and have a goal of growing their area of the country with localized investments.

The tradeoffs

Before you choose your funding option, you will first need to decide on what you are willing to give up for what you need financially. And note, what you are willing to give up is rarely what investors are willing to take for their investment. They will always want more.

Start by looking at your pro-forma. What will your company make at the end of the lifecycle detailed in your financial speculation? This is what you are stating as the minimum value of your business. This number is the "pie" of the pie chart. Looking at your new business pie, identify what your absolute minimum take will be. In other words, how much do you want to make if this business succeeds? You will not give up any more than this number.

So let's say that your minimum is 40% of the net revenue. This is the number that will make everything worth it in the end and set you up with a very comfortable life for you and yours. The remainder, in this case 60%, is what you have to negotiate with for capital investment. I always take the remainder and cut it in half and walk up to the investment table expecting to give up no more than that. This gives me the other half to use during bargaining. This method gives me room between what I am willing to give up and what I am not (my minimum).

Remember, financial gains/losses are completely different from ownership. You could give up 80% of the net revenue and still own 80% of the voting power and control of your company. We will cover ownership in a future article.

Seeking capital to launch your business is not easy. It takes time and patience. You will fail more times than not and nothing is a sure thing. You need to expect everything to take longer to close than you first thought, so plan accordingly. Good luck!

Bryan Barringer Bryan Barringer

About the author:
When he's not starting new businesses, Bryan Barringer is an independent enterprise mobility consultant and speaker, specializing in mobility, user adoption, UX/UI design, customer acquisition, product design/management and strategy and business development. Most recently at FedEx, he was in charge of evaluating mobile solutions for operations and sales professionals and leading FedEx Services' Office of Mobility and Collaboration.

Next Steps

Read more advice from SearchCIO's small business columnist, Bryan Barringer, on getting your business off the ground.

The age of small business has arrived

Acing the all-important investor pitch

This was last published in November 2014

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Have you tried crowdfunding to launch a business idea? Details, please!
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I have gone the crowdfunding route for a startup project and found it to be highly competitive and very difficult to hit the campaign's target funding goal. There are literally thousands of tech startup projects on Kickstarter and to stand out requires turning the campaign into a full time job during its duration. Even then, there is little guarantee that the funding will be achieved. Crowdfunding is good only if you have a large base.
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Great article! I'm new to the start-up scene and was interested in Kickstarter, but may now research the other options listed on this page. Thanks!
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Yeah, there are some good options out there for crowdfunding, but I'd echo Bryan's caveat - as tempting as it is to click and launch and watch the money roll in, you've got to have a plan in place for how you're going to deliver on what you promise. Platforms like this make it easier to get funding, but they can't make a business plan for you.
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