How do you raise funding for new venture? Business coach Lindy Asimus asked over the weekend. It’s a question that perplexes many people starting out a new enterprise or trying to grow an existing one.
The real question though is “how much capital do you need?” Being undercapitalised will often stunt a venture’s growth and is probably the reason why many otherwise excellent business ideas fail to achieve their potential.
How much money do you need?
While business plans are often disparaged, one of the great advantages of doing one is the budding entrepreneur gets an idea of the capital required along with the cash flow required to service any debts. Even if the business plan itself is filed away and never looked at again, understanding the upfront cash requirements can help avoid some nasty mistakes.
The other key factor is the business itself, if you’re buying a fast food franchise, setting up a store or fitting out a restaurant then there’s going to be some big upfront capital costs involved before you start trading but there is more to it than just the immediate cash needs.
What is the type of business?
A business’ capital needs are going to vary with the type of business and the objectives of the owners, not just in size but also in type. As business writer and educator Steve Blank says, there are six types of startups and for certain types an equity investment from say an angle investor or venture capital company will be more appropriate than a bank loan.
For small businesses, the type that Steve Blank describes as “work to feed the family” businesses, a bank loan that can be paid back out of cashflow is going to be the most obvious way to fund an enterprise while it would be rare a venture capital investor would even answer a phone call from such a business.
On the other hand, a family member or friend might be interested in taking equity in such a business, the old “families, friends and fools” is a time honoured way of setting up a venture.
Government grants
In these times of rampant corporate welfare for big banks and major corporations, it’s tempting to think the government may be able to help the small businessperson. Sadly most of the grants available are small sums for specific purposes like export programs or hiring trainees, they aren’t designed or intended to provide entrepreneurial capital.
Bootstrapping and “sweat capital”
Most businesses though are best served by “bootstrapping” and “sweat capital” for most, particularly in the service sectors, funding your business out of cashflow and the hard work of the founders is the way to grow a viable enterprise.
The term “sweat capital” refers to the founders working hard and capitalising their businesses from the sweat of their brows while scrimping and saving every penny. Most founders of successful businesses have stories of spending years expending that “sweat capital” while living on cheap pizzas or packet noodles.
Bootstrapping, funding your business through sales, is the other great capital source. In many ways, this is the best form of capital in that it proves a business is viable and doesn’t involve signing over assets to banks or giving equity away to investment partners. Again a well thought out business plan quickly shows whether this is feasible.
So the question of capital is complex, but having enough is always the biggest struggle for those starting a business.
Of course it is possible to have too much capital and we might talk about that in another blog post.