The 4 Stages for a Business to Raise Funds

I read recently that entrepreneurs and small business owners feel their biggest challenge is raising money and finding the funds necessary to grow their businesses.

I’m an entrepreneur, angel investor and venture capitalist. In these roles I’ve learned and experienced the highs and lows of looking for money to grow my own businesses. I also understand what investors are looking for before committing to giving businesses money.

• Bootstrapping: In the idea/experimental stage, I advise people to use their own financial resources, such as money from a savings account or careful use of personal credit cards. Wise deployment of these precious dollars is critical.

• Friends and Family: As the business grows it might need money for limited inventory or further development of the product. In this stage an entrepreneur should consider inviting family and friends to invest in the company with the understanding that their money may not be returned. This may complicate family gatherings, but in most cases, these friends and family are investing in you, not your business. You should enter an investment opportunity like this, thinking of funding, as a grant with no strings attached. If the enterprise succeeds I recommend a handsome reward for your friends and family for rolling the dice with you.

• Angel Investors: As the business reaches the next level of growth and it appears that steady revenues are on the horizon, this is usually a good time to approach sophisticated “angel” investors for funding. Most communities have angel groups that regularly consider companies looking for money. These groups can be found on the Internet where the home page describes their purpose and objectives. These groups will do their due diligence and if your business meets their requirements, they’ll schedule a meeting to gather more data. If the group decides to move forward with a business, investments can range from $50,000 to $500,000. At this stage of the business, angels become very real and serious investors and owners with high expectations looking for solid results.

• Bank Loan/Venture Capital: The time will come in a later stage of a growing business when the company, which has now been incorporated, will need a bank loan for various needs including working capital and long-term growth. Financial institutions will require several years of financial information on both the business and the entrepreneur. Collateral to secure and guarantee a loan will be needed from the entrepreneur to obtain the money needed. I always recommend the founder of a business engage with a bank at the earliest stages of the enterprise. Not necessarily for a loan, but for a merchant account, credit cards, and a checking account. Over time, the bank will become familiar with the company and the entrepreneur will be in a better position to seek additional banking products when needed.
• For some very fast growing companies, the organization reaches a point in its life cycle when venture capital funds are required for hyper growth. In this case, the company may need tens of millions of dollars to enter new markets, expand sales or add new products. Once again, these investors, who have money to deploy, conduct their due diligence to ascertain the viability of the enterprise. Their ultimate goal will be to sell your business to garner a financial return for its limited investment partners and the entrepreneur.
• And lastly, for those rare and unique companies that need even more money to accelerate growth and profits, there are funds available from the public markets where stocks are traded on the major exchanges.