By SHEENA PULAPAKA | PIVOT Magazine Guest Contributor
Having a great idea for a business is like having a seed. Without the proper resources to nurture it, an idea won’t grow and will remain a mere seed for the rest of its life. In order to blossom into a healthy and sustainable business, ideas need an investment of time, resources, and a conducive environment within which they can thrive.
For many new startups, arranging proper financing is the first step towards investing in their idea. Financing may seem like an arduous task filled with loopholes, risks, and unknown challenges at every step; however, with the right preparation and knowledge, entrepreneurs can leverage a host of financing opportunities to take their business to the next level of growth.
So, what type of financing is right for your venture?
Self-Funding – Are You Willing to Fall on Your Sword?
An entrepreneur who really believes in his or her own idea should be willing to put their own money on the table. While there is always risk associated and there is no need to drain the emergency funds, those willing to take the risk themselves have greater potential for financial success. Ask yourself – why would anyone else fund your idea if you are not willing to? Self-funding is a very common financing source for startups. According to recent research by Intuit Canada, the majority (59%) of new startups begin with nothing but their own personal savings.
Friends & Family – The Power of Early Adopters
Not everyone has a millionaire uncle, but family and friends can still be a great source for funds. This resource should not be undervalued and arrangements should be handled as thoughtfully as if they were with external investors. Entrepreneurs should draft a comprehensive business plan to show they’ve put thought into their business and to demonstrate its financial viability.
According to Ayah Norris, marketing and community manager for crowdfunding platform Indiegogo, the family and friends and early seed funding rounds have been where crowdfunding has seen a growth.
“On average, a quarter of funds raised by early-stage entrepreneurs comes from their inner circle – friends, family, colleagues, past supporters,” says Norris.
Crowdfunding not only provides financing, but also allows others to validate an idea, raise awareness and is an awesome way for an entrepreneur to validate their market, Norris adds.
Grants and loans
Government grants are an attractive source of funds as it is money that does not need to be paid back. Keep in mind that these grants many not be easy to get, as many are geared towards specific industries or groups of people such as youth, women, or aboriginal business owners. Also, application rounds often require significant lead in time. Keep in mind, government cannot move on a dime – so plan ahead and apply for grants and loans well before you need them. A great source for more information on what is available in Canada can be found on the Government of Canada’s website or you can check out Fundica, an online funding identification system.
“The real funding challenge for entrepreneurs is identifying the right opportunities without neglecting their core business and then taking a disciplined and systematic approach to securing the funding,” says Mike Lee, President of Fundica.
Government funding is less common than other financing methods; however, according to Intuit, about 4% of new startups still receive money this way. Short- and long-term loans from banks are another source of financing. Intuit’s study shows about 6% of new startups borrow money from a financial institution. Unlike grants, this money needs to be paid back and usually with interest.
Private investors such as venture capital (VC) firms and angel investors are another vital source of funding, particularly for startups in technology. According to Richard Remillard, special consultant to Canada’s Venture Capital and Private Equity Association, entrepreneurs should approach VCs when they have adequately determined what capital their company needs for growth. “VCs bring both money and experience in growing early stage companies faster than would otherwise be the case,” says Remillard.
The good news is that VC investments in 2013 exceeded $2 billion; the highest in Canada since 2007. Remillard recommends that when approaching a VC, it is important to keep expectations in check.
Yuri Navarro, Executive Director of the National Angel Capital Organization, echoed similar views.“You typically get once chance to make an impression and angels are usually willing to talk to an entrepreneur that can show they have traction in their business,” says Navarro.
He recommends startups be at least in the prototype stage (if applicable) before approaching an angel. Although not as large as VC investment, angels in Canada provided $40.5 million in investments in 2012.
Both Remillard and Navarro emphasize the importance of having a well-rounded team in place prior to approaching private investors. Although startups are often created by a lone entrepreneur, having a dedicated team shows investors that there are others who support the idea and are willing to take on the risk of backing it. Navarro and Remillard also recommend tapping into and expanding your business connections.
“Strengthen your network. Only a fraction of angel groups are willing to be public. You have to build out your network and get involved in a space that investors are paying attention to get noticed,” says Navarro.
Ultimately, the ability to access funding depends on an entrepreneur’s preparedness and drive. By understanding how capital can propel a startup to the next stage and how having the metrics to prove success can backup your pitch, an entrepreneur can maximize his or her chances of successfully securing funds.