Funding Strategies for New Businesses

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Dr. Earl R. Smith II
Managing Partner, The Federal Circle
DrSmith@Dr-Smith.com
Dr-Smith.com

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After the rush of figuring out a new idea for your business and pulling together a team to run it, one challenge faces all entrepreneurs. They must find the necessary financial resources. For some, the ‘money hunt’ can come to dominate their activities. Others find solutions that allow them to at least launch the business. Many companies founder because the team never figures out how to meet this challenge. How you meet this need is one of the most important steps in determining if your company is at least going to have the chance to succeed.

Early-Stage Funding Options

One of the principal reasons that founders find such difficulty in meeting this funding challenge is that they try to skip stages in the process. Many of them try to raise funds far in excess of the levels that their current situation merits. Investors make a distinction between a business builder and a lazy entrepreneur. The latter generally has a poorly written business plan or a vague idea for a business and approached them looking for five or ten million dollars to their ‘idea’. The former has shown prudence, professionalism and a sense of proportion in their efforts. One get serious attention while the other is the butt of jokes.

For a very early stage company, true funding requirements may extend only to filling the need to perfect the value proposition and develop a prototype. During this ‘project’ stage, there is no clear demonstration that the underlying value proposition can be monetized. There are no customers who have indicated, through their purchases, that what the company is offering is worth the projected cost. At this stage, entrepreneurs need to tap the three ‘Fs’ to meet these needs; friends, family and fools. Approaches to other sources will, for the most part, result in a waste of time and energy with little prospect of success.

Good entrepreneurs understand that they have to develop their company to a certain stage before either angel investors or venture capitalists will give serious consideration to funding it. But the challenge remains. Even the three ‘Fs’ may not be enough to get it to that stage. At this point, founders need to become very creative in their approach. There are many other, early-stage sources that can be tapped. Here are just a few of them:

• SBIR and STTR Funding: For certain companies, government funding is a real possibility. These programs offer money for development of prototypes and even simply proof of concept. In fact, stage one of the SBIR program is exactly that. In return for the right to use the results, almost every government agency will fund such proof of concepts in areas that they are interested and for problems that they need solved. Stage two of these programs offer follow-on funding for further development. The company retains the developed intellectual property with only the above restrictions.
• Potential Customers: This approach is a first, major test of the value proposition that the company is promoting. The logic is, ‘if your product or service is as valuable as you think it is, your potential customers should have an interest in its development’. Many companies have been launched using this approach and never had to go the further step of raising venture capital. There are additional benefits of this approach. First, you get to test your ideas in the real world. Second, your potential customers will help you refine your value proposition. Third, they will help you expand your pool of potential customers through referrals and references.
• Joint Ventures: Another option is to find a well established company to partner with. Although there are dangers involved such as keeping control of the intellectual property, many companies have successfully managed this risk and tapped into significant financial resources. Joint ventures are particularly relevant for high-technology companies that have either cutting edge or disruptive technologies.
• Grants: There are organizations and associations which are dedicated to supporting the development of certain technologies. Many of these provide development grants to emerging companies. Although the amounts may be small, the restrictions on the use of proceeds are generally few. Some companies have accessed a fairly regular stream of these grants to support development of new innovations or functionality.
• Bootstrapping: Sweat equity is defined as the time and effort that a team invests in getting a business to the stage where investors will be interested. This means taking it beyond the ‘business plan’ stage by sheer force of will and dedication. It may mean that founders will have to go without a paycheck for some time or that they will make barter arrangements that will give them access to the resources they need. They may have to take out a mortgage on their house or invest their savings. Such bootstrapping demonstrates a determination to succeed that extends well beyond verbal statements of commitment.

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