It takes a village to start and build a new enterprise.
Deborah Sweeney, small-business expert and CEO of MyCorporation, believes entrepreneurs can use this principle when entering the initial-development phase of a new business.
Starting with the village of friends and family, she suggests several ways of financing growth.
While other experts believe self-financing is the true mark of an entrepreneur, it is often the most difficult for new entrants to accept.
Sweeney says it is the easiest method to get pre-seed money, but often the scariest. It is also unlikely start-up proprietors have enough money saved to adequately start their business. So they should look to additional sources.
She suggests using this money to begin to turn one’s business idea into a reality, which may help allay investors’ concerns of viability.
The next step is to turn to friends and family. As she says, there is an old cliché, better known among doting parents than entrepreneurs that can help get the new enterprise on its way; “ ‘It takes a village.’ The concept, despite the overuse of the phrase, is a good one at its core. One of the best ways to achieve something difficult, such as raising a child, is with a community of support.”
Don’t expect this to be easy money; treat friends and family as one would any other investor. Make sure all of the terms and conditions are written down and agreed upon by all parties.
Even with friends and family get a lawyer involved. That can save heartbreak, anger and disillusionment later.
Entrepreneurs should realize that friends and family probably won’t have enough money to fully fund the start-up.
After the business gets started and the concept proven, look for angel investors/venture capitalists.
Angel investors are individuals who invest a large portion of their own money into helping entrepreneurs start businesses. This means they want large returns and an exit strategy.
However, when others put their money where their mouth is, that does validate the enterprise.
Venture capitalists do the same thing, but from a pool of money. This means they are more stringent with whom they lend to.
Both angels and venture capitalists may want to see an actual concrete product or equivalent, instead of just an idea.
While bank financing is a more traditional route, banks don’t like to invest in new companies. Most banks want to see two or more years of experience before lending to a company.
This is why many start-ups use personal credit and credit cards to build up business credit.
The Small Business Administration is a government organization that doesn’t supply direct loans, but offers to be a guarantor for a significant portion of loans offered by banks.
Many large banking institutions such as Chase and Bank of America are significant lenders but have pulled back in recent years, other experts say.
The SBA will also work with venture-capital companies who, in exchange for an active role in the development of the business, will lend funds from the VC company’s investment pool. Other experts warn, however, that VC companies do take a significant position in the new enterprise and are more likely to remove management when goals aren’t reached.
The SBA provides Small Business Investment Company licenses to various private venture-capital organizations, which its Web site lists by state, at http://www.sba.gov/content/all-sbic-licensees-state.
Sweeney warns would-be entrepreneurs:
- Lenders and investors likely will rely on a mixture of ideas; after all, it takes a village.
- To validate the enterprise requires significant investment in time and dollars, but despite the frightening prospect of taking out this much money, it is worth the gamble.
- Whatever option is chosen, remember to remain committed and patient. Final results typically are worth the long wait.