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Recently, we were speaking to a group of entrepreneurs and would-be entrepreneurs when one of the latter asked a familiar question: “I have a great business idea; how do I get it funded?” We hear this concern frequently from entrepreneurs contemplating a startup. However, we don’t think that a lack of funding is typically the issue — it’s a symptom.
Typically, the issue is that the would-be business owner either doesn’t actually need funding (in spite of what he or she thinks) or doesn’t have a compelling business plan that lays out clearly why prospective investors should plop down their hard-earned funds.
So, here is what we said and continue to say on this issue to prospective entrepreneurs:
You don’t need funding.
Many businesses can be bootstrapped at low cost. That is, they can be self-funded with minimal or no investment. Companies that meet this criteria have the following characteristics:
- Startup costs and fixed costs are low or nonexistent.
- Working capital can be kept to a minimum; there is no need to purchase large amounts of inventory or carry huge accounts receivable.
- Overhead costs are modest. For example, the enterprise can be run out of the entrepreneur’s home; expensive office space, while desirable, isn’t required.
- Employees either aren’t necessary or can be hired as needed on an hourly basis.
- Revenue that exceeds variable costs can be generated quickly.
These businesses can be cash-low positive almost from the get-go. We’ve been approached numerous times by people wanting us to invest in these types of startups. And our response to them is always the same: You don’t need funding. You need to sell something. Get started.Demonstrate that there are people willing to pay for the product or service you are offering and that there are enough of them to allow you and your business to thrive.
One caution is that an entrepreneur may have a period of time when he or she won’t get paid and will need a plan for overcoming this lack of cash. But it’s important to know here that eclipsing break-even cash flow on a personal level usually takes twice as long and costs twice as much as you think. So, build a contingency into your thinking.
Concentrate on your business plan.
If the enterprise you wish to launch doesn’t fit the above criteria and you don’t personally have the money to underwrite the venture, you will need to seek funding after all. And here you will need to know the many sources of funding possible — from friends and family members, to private angel investors, to venture capital firms to alternative lenders.
However, one thing that all of these potential sources of funds will (or should) require is a solid business plan.
You can find detailed instructions on how to write a business plan on the web (and we suggest you do this research). However, there are a number of fundamental questions that any good business plan must address:
- Why should a perspective customer buy your product or service rather than a competitor’s? What makes your offering different, better, worth the price you will charge? What unmet need are you meeting, or what need are you meeting better than the current alternatives?
- Is there a segment of the market that values the thing that makes your offering different and is it large enough to sustain your business?
- How will you reach your target segment with your marketing message?
- What are the barriers to entry in your business? In other words, if you are successful, what will keep others from copying your idea?
In addition to addressing these questions, you’ll need a good set of financial projections. The financial projections must clearly show:
- The economics of your business. You’ll need to lay out:
- The one-time costs (e.g., equipment costs, etc.)
- The overhead costs (e.g., rent, utilities, etc.)
- A positive variable contribution — you can sell the product of service for more than it costs you to deliver it
- How deep a hole you will dig before you become cash-flow positive and therefore how much money you will need
- What you are willing to give up to get the funds (e.g., 20 percent of the business)
- How long it will take for investors to earn back their investment
- How much investors can expect to make after they have earned back their investment (their “return on investment”)
It’s critical to think about the deal from the investor’s prospective. You must show prospective investors what’s in it for them or they won’t be interested. The tips above are not, nor are they intended to be, comprehensive. However, they will give you a good start and provide a good acid test for any plan you develop. If your business plan doesn’t address these issues, it isn’t sufficient.
As we told the would-be entrepreneur at that meeting, lack of funding for a business isn’t the problem; it’s a symptom. The problem is typically either that your business doesn’t need funding or you don’t have a compelling business plan.