If youâ€™ve ever thought about starting your own business youâ€™re not alone. Along with millions of Americans, the dream of being your own boss carries with it both rewards and struggles.
Among the most difficult, but not impossible, steps in the process is obtaining the capital to fund the project. After firmly deciding take on the challenge of creating a new business, the question is how to go about it. Among the options available are friends and family, bank loans, and venture capitalists.
Ebay founder Pierre Omidyar explains that once he had decided on the task of establishing his company among the most important needs is to have faith in the work still to be done.
â€œIâ€™ve always had kind of this unshakable faith that it's going to endure,â€ he said, according to the Academy of Achievement. â€œYou have to be passionate enough about it so that you will put in the hours and hard work that it takes to actually succeed there.â€
What are Friends For?
The entrepreneursâ€™ families and friends of are an often tapped source of initial funding for new enterprises.
According to Asheesh Advani, a columnist and business owner, says that nearly half of American entrepreneurs turned to family and friends, according to the Chicago Tribune.
Among the main advantages of such financing is that no credit check is required because the lender or investor already knows the person. Depending on the giver is, payments are flexible both in terms of duration and corresponding interest payments.
Jeff Bezos, founder of Amazon once told about how he received initial funding from his parents, who simply saw the entrepreneur as kin.
â€œHe (Bezosâ€™ Father) wasn't making a bet on this company or this concept. He was making a bet on his son, as was my mother,â€ said Bezos.
The downside to this type of financing is to risk damaging a life-long relationship with a friend or loved one due to the inability to repay. For some, this may be too much to bear.
For those not interested in such arrangements, other options are available.
Going into Debt
The idea that banks are less interested in investing in small businesses is wrong. From 1995 to 2004, small business loans increased180 percent from 5 million to 14 million, according to the Small Business Administration. Currently there are over 6,000 banks and BHCs (bank holding companies) operating in the small business market.
An advantage of taking out a business loan is that debt is a tax deductible expense. Another is that creditors are satisfied by not having an ownership stake as long as repayments are made according to schedule.
Foreclosure is often the last resort. However applying for a bank loan does require a credit check. A bad credit history could easily impact the ability of the applicant to obtain the funds. Last but not least, a solid and well thought out business plan is essential.
Angels and Venture Capitalists
For companies which have started but need a cash influx to go to the next level, Venture Capitalists and Angel investors could be a the way to go. The latter can provide from hundreds of thousands to millions, depending on whether the company involved has good prospects and a firm plan with some previous success. Angel investors, on the other hand, could provide more of a mentoring role along with the cash needed to get going.
The â€œAngel investorâ€ generally wants less control of the company and a slower return on investment than a venture capitalist (VC). The latter usually wants a stake in the company along with a high return rate, above 20 percent per year.
In the first quarter of 2006, VCs invested $5.6 billion, taking part in 761 deals, according to The Money Tree report by Price Waterhouse, Coopers.
Venture capital could come from both individuals and corporations set up for the purpose of investing. In addition, the individual or entity could be a general or specialist investor.
The common denominator in all these types of venture investing is that the venture capitalist is not a passive investor, but has an active and vested interest in guiding, leading and growing the companies they have invested in, states the site of the National Venture Capitalist Association.
Along with a capital injection, the advantages of a VC investment include an objective focus for the companyâ€™s direction. A VC can also have strong, extensive contacts across the industry, thereby facilitating business growth.
However by taking a large stake in ownership, VCs can gain the power to make managerial changes. With a stake in the company, personalities could clash and a powerful but unsatisfied VC with a voice in the boardroom could even lead a shareholdersâ€™ charge to replace those running the company.
Attracting Venture Capital â€“ How?
Among the factors which make a difference in attracting the VCs attention are cash flow, a strong management team, and the willingness of the founders to cede control in exchange for cash, experience and knowhow.
Amazon.com, currently the Internet's largest retailer, was able to survive in the marketplace because of cashflow even after accruing a deficit which reached $2.86 billion in 2001, just over 4 years after the company had been founded.
The key to remaining in business was that the firm had a consistent stream of cash coming in and marketable securities, which it was able to use to pay creditors and other expenses even though losses were accumulating.
Since the late 90s and and the early part of this decade, VCs have focused much of their attention, and dollars on the Internet and Silicon Valley.
Another factor can consider is the quality of the company's management and its previous work.
Even in the wake of a tech bubble in 2000 which saw venture capital decrease precipitously, those holding the purse strings were still looking for a company with a strong management team that could point to past success in a growing technology field, according to Steve Bird, general partner at VC firm Focus Ventures.
The companies that do a better job explaining their revenue and high-quality customers are getting the funding they're looking for. Before, companies were focused on website hits and other odd measurement, said Bird in 2004 to PR marketing firm Blueshirt Group.
He noted that the onus was on prospective companies to do a better job of presenting themselves.
Finally, being able to sacrifice some equity in the company could be a deterrent for some but would be the perfect option for those looking for an an active investor. This could even mean that a company's founder could sacrifice a leadership position to enable the company to go on to greater success.