Adequate capital and financial backing is vital for both the start-up and continuation of an e-business. In fact, inadequate financing is one of the principal reasons behind business failure. For example, hurt by lack of funding from investors, Hollywood Entertainment Corp.''s video and DVD shop Reel.com recently closed its doors. In order to avoid what has befallen many ecommerce companies in the recent shakeout, you must not only have adequate capital, but the knowledge to manage it well. Experts say you should have enough money to get through the period of time before your business starts turning a profit. Ideally, that would be a 12-month cushion to handle all of your business''s expenses.
New businesses usually are financed in one of three ways:
- Self-financed: You provide the funds. Also referred to as early stage capital.
- Debt financed: You borrow money from a bank or other lending institution.
- Investment capital: You take on someone who acquires a partial interest in your business in exchange for money.
In this article, we''ll look at all three methods, some of the players in their respective categories, and what new e-business owners should expect when seeking out start-up financing at this nascent stage in their business''s development. Friends and Family
A new business''s initial financing usually begins by shamelessly getting on your knees and begging family and friends to help provide the initial funds for you to get the business going. This is also the stage in a new business when you hear sordid tales of new entrepreneurs maxing out their credit cards and cashing out 401(k)s . Funds raised during this stage can amount to somewhere between $100K - $500K, or more.
Whether you borrow money from a friend or family member, make sure you forget the friendly handshake and do yourself a favor: sign a promissory note. A legally binding contract in which you promise to repay the money, a promissory note will at the very least make the lending a legitimate act, as well as help preserve friendships and family harmony. Most promissory notes are as simple as a document that says "I promise to pay you $xxx, plus interest of xx%" and then describes how and when you will make payments. A great resource for accessing prewritten legal forms, including promissory notes is Nolo''s Law Store at Nolo.com.
If you can''t scrape up enough funds from friends and family, there is the option to borrow from good ol'' Uncle Sam.
Government Loans and Financing
The U.S. Small Business Administration (SBA) is a U.S. federal agency that aims to assist small businesses with advice, financing, and other business development aid. The SBA offers a multitude of loan programs for business owners who are unable to secure reasonable terms through normal lending channels. The SBA is not a lender itself but guarantees loans available through private-sector lenders. Its Web site ( http://www.sba.gov/) provides information on its various loan programs as well as forms and checklists you can use during the loan application process.
Specifically geared towards the fledgling business, the SBA established the MicroLoan program. You can borrow up to $25,000 for up to six years, at an interest rate no higher than prime plus four percent. Microloans are handled by community economic development groups selected by the SBA. They are designed to help brand new businesses get off the ground, with funds often used to buy computers, printers, extra phone lines, and acquire other materials you''ll need to launch your business.
Angel Investors
As businesses become successful, finding additional equity capital becomes increasingly difficult. Another initial source of start-up funding, often referred to as "seed capital," is frequently provided by Angels. Angels generally are wealthy and business savvy individuals who take an interest or equity stake -- a quantum approach of sorts -- in entrepreneurs, their ideas, and their companies. They participate by putting their capital to work on good, new ideas and can also bring valuable managerial resources and advice to the table. They may or may not take an actual interest in the day-to-day operations of the company into which they invest. Individual Angels typically invest from $25K to millions of dollars. A word of caution though about Angel investors: they are not just benevolent philanthropists willing to part with their money. They hold equity in your firm, and also hold some control over your firm.
A good resource for finding out more about angel investing is EXP.com. They have 150 experts lined up and ready to offer you Angel investing advice - for a fee, of course.
If you''re looking to locate angel financing, there is a plethora of sites on the Net that specialize in matching up entrepreneurs with Angel investors. Here are a few to get you started:
- International Angel Investors Institute: A non profit business league for connecting and educating Angel investors and entrepreneurs.
- Business Angels: Currently focusing on Europe, this site matches entrepreneurs and investors. It will also be expanding to the US soon.
- AngelTips.com: Offers investors global access to emerging ideas and presents entrepreneurs with the opportunity to make their dreams a reality.
- Garage.com: Helps entrepreneurs and investors create, build, staff, and fund promising early-stage technology startups. Garage.com focuses on startups within the B2B ecommerce, communications and networking, Internet tools and infrastructure, hardware, life sciences, semiconductors, and software sectors and the services are tailored for startups seeking to raise initial financing between $500,000 and $10 million.
Internet Incubators: A Startup Is Born
Internet incubators do more than just fund new Internet startups - they actively participate in recruiting the new firm''s employees by luring promising talent. Instead of just handing over a hefty sum of money and well wishes, many incubators are also handing over top-notch management teams to help ensure the business''s success. Incubators can be either for-profit or non-profit and are usually industry-specific, so if you decide to venture down this path, take your time selecting one (or letting one select you) and make sure you''ve got the right fit. Three incubators making lots of headlines these days are idealab!, eCompanies and I-Incubator.
eToys, carsdirect, citysearch ... sound familiar? They''ve all been hatched by idealab!, which was founded in March 1996 by entrepreneur and Net luminary Bill Gross. idealab! currently has approximately 50 businesses in various stages of development. In addition to infusing capital into a new business, idealab! provides a full range of resources to rapidly launch start-up companies. Resources includes office space and the accompanying network infrastructure, consulting and services relating to development and technology, graphic design, marketing, competitive research, legal, accounting and business development support and services.
The eCompanies incubator, founded last summer by Net heavyweights Sky Dayton and Jake Winebaum, was created to rapidly launch Internet start-ups that will grow into profitable, lasting franchises. The incubator, which focuses exclusively on Web-based services, provides the critical services start-ups need in seven disciplines: strategy, finance, recruiting, creative, technology, business development and marketing.
i-Incubator, another recent addition in the incubator arena, was also founded in 1999. i-Incubator provides capital, infrastructure development, strategic consulting, Internet development, and advisory services to early-stage Internet ventures.
If you''re more of a local operation, or not quite ready to pitch your hot idea to a 28-year-old netrepreneur while snowboarding on the slopes of Aspen, then an excellent resource to tap into is the National Business Incubation Association. The NBIA is the world''s leading organization advancing business incubation and entrepreneurship. On the site you can find links to regional incubation associations and recommendations on how to choose an incubator as well.
Venture Capitalists
Attracting the attention of VCs isn''t an easy accomplishment for small businesses just starting out. Venture capitalists typically invest in high-growth industries promising huge profits. They are notoriously impatient, and expect large and almost immediate returns on their investment. Venture capitalists don''t just invest their own money; they raise funds from wealthy individuals and institutional investors who seek to allocate a portion of their holdings into potentially very high return investments.
For more information on financing your new ebusiness through a VC, check out the following article: Twelve Principles to Get Venture Capital Funding
Whether you choose to venture out on your own or take a collaborative approach to financing your business, securing enough capital is one of the most critical steps in the process. Rather then being focused on getting rich quickly, future e-business owners should focus on actually building a business that works in the long term. Remember, in the end, it''s not about getting as much money as you can it''s what you do with it that counts.
IE 7
Firefox 2.0
