Raising cash for startups and high-growth small businesses is one of the biggest challenges faced by entrepreneurs.
I recently met with a start-up founder. He was young, very clever, pleasantly business savvy for a software developer and had a great SAAS product that was getting excellent feedback from his clients. He didn’t have assets he was willing to risk (like their family home) and he could pretty much forget about banks. Luckily for him, there are several other means of raising cash for startups and high-growth small businesses.
Indeed, successful entrepreneurs often use multiple sources for their cash needs. This approach ensures there is always sufficient cash on hand for research and development, product development and launch, and to grow the business.
Raising cash for startups and high growth small businesses from multiple sources also has some additional advantages:
Less reliance on one or two parties
Diversification of your cash sources means you won’t be as reliant on relationships with one or two people or a financial institution. It won’t matter that you cannot obtain a loan from a bank — you can turn to other sources to raise funds.
Less vulnerable to changing economic conditions
You can still obtain cash even when the economy has slowed, and financial institutions are unwilling to fund your business. You will also be less exposed to other variables such as interest rate hikes.
Reduces the cost of obtaining capital
Raising cash for startups and high-growth small businesses can be much quicker and cheaper when you use the sources listed below. Crowdfunding, for example, is a far simpler way to fund a product development compared to an Angel Investor.
Sources, Timing and Amount
The where, when and how much of raising cash for startups and high-growth small businesses can be graphically depicted as follows:
As can be seen, raising cash for startups and high-growth small businesses is largely related to the maturity of your product/service and the amount of cash required. Let’s look at each of these sources in more detail.
The Three F’s (Friends, Family, and Fools)
Family, Friends and Fools are a very common source of capital for startups. The Three F’s are particularly useful for small loans which, when combined with your own savings, can fund early stage research and product development. Raising cash for startups from Three F’s is typically the lowest cost source of cash available to entrepreneurs.
If you accept a cash from Three F’s it’s important to treat their investment with respect. Show them how you intend to use the money, what return they will achieve, and when they will receive it. Use a simple contract that clearly spell out details of their investment. This reduces the risk of damaging your relationship with your family members or friends.
Local, State and Federal Government Grants are another low-cost means of raising cash for startups and high-growth small businesses. Some of the government departments providing grants, assistance and other support include:
- Department of Industry, Innovation & Science (Federal)
- Business Queensland (State)
- Brisbane City Council (Local)
Crowd funding raises cash through donations from the general public (backers). It is usually performed online via crowd funding websites like ReadyFundGo, Pozible and KickStarter. Each participant donates a small amount of money to help the business achieve a specific goal, like launching a new product or opening a new store.
To encourage Backers, startups and small businesses typically offer incentives based on the amount donated. Incentives can be acknowledgement, merchandise, or discounts on future purchases of the product under development.
Depending on your product/service offering, Crowdfunding can be a low cost and low risk way of raising cash for startups and high growth businesses. In addition, it facilitates early engagement with and valuable feedback from early adopters and potential customers — which makes refining a product or business model easy. Crowd funding is also a low cost and low risk source of cash.
Angel Investors provide emerging companies with seed and startup capital through direct, private investments as well as offer introductions to valuable contacts essential to your company’s success.
Raising cash for startups and high-growth small businesses from Angel Investors is best approached by identifying your local Angel Investor Group (e.g. Brisbane Angels). An Angel Investor Group has the advantages of combining experienced high-tech leaders, dedicated investment capital, and professional venture capital managers to execute seed and early-stage investing. Angel Groups are comprised of many private investors who form sub-groups, sharing due diligence and investment risk, and typically take minority equity positions in early stage technology companies that meet the following criteria:
- Location proximity to group members
- Addresses a significant/compelling market need
- Fast-growth segment and market size enabling
- Protectable technology or business model
- Coachable and qualified management team
- 4-8 years exit with ≥ 10x return
Many Angel Investor Groups encourage startups and high growth small businesses to submit their business plan online. If your business shapes up against their investment criteria, you may be invited to make a pitch at their next monthly meeting.
Venture Capital & Private Equity
Venture capitalists and private equity firms are like large and larger Angel Investor Groups and seek very high returns (mostly through capital gains on exit) on their investment. Being on a larger scale than Angel Investors, there are several pros and cons of Venture Capital/Private Equity:
- Business Expertise – VC/PE financing comes with a valuable source of guidance and consultation that brings about making better strategic business decisions.
- Additional Resources – the larger VC/PE firms provide active support in critical areas of legal, tax and human resource management.
- Connections – VC/PE firms are usually well connected in the business community especially when it comes to scaling up or expanding into foreign markets.
- Loss of Control – given the scale of investment, VC/PE firms will want more involvement in your business.
- Minority Ownership – it’s likely a VC/PE firm will want a controlling stake in your business.
Raising cash for startups and high-growth businesses is an exciting and stressful part of your entrepreneurial journey. Generally speaking, the more cash required, the more sophisticated and demanding the source, the higher quality financial information, especially projections, you will be expected to provide and the more time it will take to close the deal. Plan ahead to ensure the cash arrives just before existing cash reserves run out. Be open minded and remember that a smaller share of a large pie is better than all of a very small pie.
If your startup or high-growth small business is considering how best to meet and prepare for its future cash needs, please email or call me on 0418 697 701 to arrange a free, no-obligation chat to see how I can help you.