Funding For Startups
When talking about funding for startups, I continually find it interesting (and disheartening) that the business community so closely (exclusively?) associates “startups” with Venture Capital. In fact, a young entrepreneur recently told me that a business should not be called a “startup” until they begin searching for venture capital.
The Reality
That was a very naïve comment, and here’s why: According to the Kauffman Foundation, there
were over 6.5 new businesses started in the U.S. during 2010. Also, according to PriceWaterhouseCoopers reports, there were 3,277 venture capital deals made during 2010. Not very good odds.
So, where did the funding for startups come from to start the remainder of the 6.5 million new businesses?
Angel Investors
Certainly some financing came from Angel Investors, but their requirements are not that much different from the VCs. Angels usually precede VCs and get a company started before the VC becomes involved.
The data is elusive, but It appears that (certified) Angel investors may not have made substantially more deals than the VCs did. Even if they made 10 times as many deals as the VCs, that would only account for about one-half of one percent of the total startups for 2010.
Angel investors are actively coming together as “groups” that act on new venture deals as investing partners, just like the Venture Capitalists. The lone wolf angel investor is a dying breed.
Banks
Of course, no bank is going to provide funding for startups (other than, perhaps, a personal loan to the entrepreneur…if they have substantial collateral). There is also no indication that banks will begin more aggressive lending to businesses, especially small businesses, anytime in the foreseeable future.
Banks certainly are not the answer now, or any time soon.
SBA Loans
We need to remember that SBA loans are made by banks, not the government. SBA loans are only partially guaranteed by the government, and I have been told by many bankers that their SBA loans must meet the same borrower requirements as a non-SBA loan. Therefore, in reality, the SBA is not the answer either.
Grants
There is no such thing as a U.S. government grant available for the purpose of starting a for-profit company. There can be local “incentives” like tax postponement, subsidized property or facilities, etc., but finding grant money to start a for-profit business in the U.S. is like finding the Holy Grail.
While many of the economically emerging countries are offering strong incentives to entice American entrepreneurs to start businesses in their country, the U.S. seems paralyzed about doing anything to keep those businesses here, let alone expand our own business community.
Who’s Left?
Well, that still leaves something over 6 million new startup businesses without any realistic form of outside funding. That means the primary sources of funding for startups available in the U.S. are: (1) the entrepreneur’s personal borrowing capacity, (2) family, and (3) friends.
Unfortunately, for nearly all of the over 6.5 million new U.S. businesses that will start up during 2011, the only investor decision that can be made is which family member or friend to approach first. Very sad.
How did you fund your startup business?
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The Shark Tank
Season 2 of the Shark Tank is upon us and, like season 1, it is filled with all the drama that the entertainment industry can muster. Actually, it is quite entertaining (no blood, guns, or violence).
Unfortunately, the show gives the wrong impression to aspiring entrepreneurs. It looks pretty simple to just stand in front of a group of investors while describing your product or service, and then have the investors jump at the chance to invest in your (their) new business…or not.
On the other hand, it may be quite instructional for teaching new small business owners about how NOT to ask investors for money.
That’s why I recommend watching the show. An aspiring small business owner can pick out all the mistakes the entrepreneurs make when presenting their ideas to investors. The great majority of entrepreneurs presenting on the show are so unprepared to ask for investment money, they usually come across as pathetic.
For some insights on actually financing your new small business, try the information on my main website. Click here.
Take a look at the show and then don’t make the same mistakes when you meet with an investor yourself…even if it is only your uncle Ed.
Shark Tank is on ABC Friday’s at 8:00 pm PDT.
Angel Investors and “Super” Angels
Angel investors have long been the backbone of early financing for startup businesses. They have stepped in when money from family and friends runs out. Angel investors have traditionally filled the gap between owner-raised investment money, and venture capital investments.
Now, however, Angels are banding together and forming more “groups” of investors—Super Angels—to raise the limits of their investments, while spreading the risk. This creates a new “grey area” where the Super Angels and Venture Capitalists overlap.
According to a recent study by the National Association of Seed and Venture Funds, the number of Super Angels has grown 40 percent just in the last year. More importantly, 51 percent of association members have indicated that they intend to invest more money in startup companies this year than they did last year.
This is good news for entrepreneurs—as long as you are properly prepared to fast-track the growth of your business. Super Angles want to see a strong management team that can make the most of their investment money. Neither Angels, nor Super Angels will invest in just an “idea”—they want the entrepreneur(s) to be operating and have some skin in the game already.
In addition, your business needs to have the potential for explosive growth to tens of millions of dollars in revenue in just a few years. Also, you will need to convince a Super Angel that you can return three to five times their investment within five years—usually through acquisition.
This is good news for high-potential startups, but you will need to prepare well before you meet with investors. Even though there is investment money available, there is tremendous competition seeking it…so you better bring your “A” game.
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Small Business Startups–Beware! Part 2
Last week I wrote about the angel investor scam that Jason Calacanis recently brought to light on his weblog. Jason has now posted Part 2 of his series, which includes testimonials from entrepreneurs who have been victimized, and also comments from a few former employees of some of these questionable operators.
After reading the testimonials in Jason’s Part 2, I am appalled that such a flagrant scam is being perpetrated on entrepreneurs trying to start a business. It appears that this is just another example of the greed and selfishness of unscrupulous business people.
Calacanis also reported that he is now being sued by Keiretsu Forum for mentioning them in his Part 1 post. It appears he is expecting more lawsuits in the future as he digs deeper into this issue. He says he will sell his Tesla, if he has to, to pay his own legal bills.
Jason apparently is trying to get people involved in this issue on his weekly podcast “This Week in Startups.” He is inviting people from both sides to participate, although, after reading his newest post, I doubt that any investors will want to be on his show
If you are looking for startup funding, and considering angel investors, you may want to review Calacanis’s weblog posts first. Part 1 breaks the issue wide open, and Part 2 presents some “smoking guns.” The posts are long, but they could save some people a lot of money.
As I stated in my first post, there are many investors, both angels and Venture Capitalists, who operate ethically and openly—you do not need to pay just to get a meeting with them. You do, however, need to give a compelling reason for them to meet with you, i.e., a great idea, and a well-thought-out business plan.
But remember, unless you are starting a technology company, this is usually not the best source of funding for most small business startups.
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