Financing Your Small Business
The options available to you in financing your new small business depend upon the opportunity you are pursuing. Venture capitalists look for big opportunities, especially those with IPO potential. Contrary to popular belief, most modern venture capitalists do not make money by investing and building great long-term businesses. Many venture capitalists today sell shares in their ventures as soon as they can once the company goes IPO. So, unless your company has IPO potential, and you wish to take your company public, most venture financing is realistically unavailable to your business.
Furthermore, due to the ease with which new Internet companies went public in the late 1990's, most venture firms now manage several hundred million dollars or more. Because of this, many firms want to back bigger ventures. They are looking to "put larger dollars to work."
However, the tremendous financial returns to entrepreneurs of the 1990's has also created many new affluent business owners who have become angel investors. There are probably more angel investors today than anytime in history.
Unlike many venture capitalists, angels are not always looking for a quick IPO company. They tend to invest in companies longer term. Angels often are looking to invest anywhere from $10,000 to maybe $2,000,000.
Some angel investors can also contribute tremendous business insight and experience. But, be especially careful to do "due diligence" on your angel investors. Be sure they realistically can afford to make aggressive investments in your business and that they understand the risks. Agree, ahead of time, what, if any, non-investment involvement the angel will have with your company. Angels should be labeled as "accredited investors," which is a fancy way of saying they are rich enough and smart enough to make aggressive investments.
With either angel investors or venture capitalists, you will need to give up partial ownership of your company. Very few angels or venture capitalists will invest without equity upswing potential.
If you wish to retain full equity (ownership) of your small business, you will only have debt financing available to you. This means, if you are lucky enough to get a loan, you will be required to pay back interest and principal, but you will own 100% of your company.
The SBA has many programs to help small business owners secure loans. Most banks will not loan money to small, start-up businesses. I'm not a big fan of debt financing a new venture, because interest payments become another mouth to feed.
The only remaining option to finance your small business is your own savings. This is how most businesses get started. On the plus side, you will have no interest to pay and will own 100% of your business.
In Thinking Like An Entrepreneur I discuss risk-shifting by seeking equity investors in more detail.
Financing Ventures with Credit Cards, Bank Debt, or Retirement Funds A discussion of some financing options you probably will not want to use and why.
Small Corporation Offering Registration. This is for "little" companies that want to go public. You may only raise up to $1 million with a SCOR offering. Please consult your state resources for more information regarding SCOR in your state.
Angel Investing and Entrepreneurship