How to Find Start-Up Money For Your New Business

“Angel investors,” venture capitalists, buyers, funding, lender financing, strategic alliances, technology transfer, merger/acquisition, start-up, turnaround assistance…all of these terms have one thing in common: On one end of the equation, someone is looking for money. On the other end, someone is looking for a good investment. Even in tough economic times, people are creating businesses and a few studies show that because so many people have lost their jobs, many are now starting their own businesses so they won’t be put in that position again. One of the greatest advantages of self-employment is that you are your own boss, you can’t be laid off.

The big question is: How can you, the burgeoning entrepreneur, get the right parties together at the right time? In this article, I’ve gathered resources that will help you get started on that winning business plan, find the right investor, and apply for funding on the Internet.

Write a solid business plan

As an entrepreneur with a great business idea, a business plan should be the first thing on your mind. Without a doubt, the business plan is the single most important written document in the early stages of a company. Successful business plans convey your ideas, research, and goals to others in a succinct way. However, the longer the business plan, the less likely it is to get funding. Keep it simple: The plan should contain the business concept, the marketing, production and technology elements, the backgrounds of the principal founders, and how much money will be required.

Where should you go for financing?

According to the National Venture Capitalists Association, there are approximately 741 venture capital companies in the United States that manage about $257 billion. Based on 2006 data, venture-backed companies have created companies that accounted for 10.4 million jobs and over $2.3 trillion in revenue.

Another category of investors, called “angel investors,” is estimated to be 350 times the size of the venture capital industry. As of 2007, there were 258,000 active angel investors in the U.S. Angel investors bear extremely high risk and because of this, expect a very high return on investment. Angel investors usually fill in the gaps in start-up financing between “friends and family” (sometimes referred to as FFF – friends, family and fools!). When you add traditional funding sources such as independent, non-bank lenders, the picture can get really confusing to the little guy with a big idea.

In reality, the two groups tend to look at transactions from very different perspectives. Lenders are mostly concerned with whether the borrower can repay the money, while investors are more interested in how far an entrepreneur can take a business idea. Ask yourself what approach you would want your financial partner to take, because chances are, they will be with you a very long time—typically five to 10 years.

There is no road map to finding financing. Even the experts agree that it is confusing, frustrating, and a real deterrent to small-business entrepreneurs who go looking for capital. In fact, most small businesses are started with credit cards and personal loans. Hence the question: Which way do you go—lenders or investors?

Find the right partner

Professional investors operate under the “2-6-2 Rule,” which states that 20 percent of investments will be winners, 60 percent will be low-producers, and 20 percent will cease to exist. Those winners will pay for the remaining 80 percent and still show a return on the total investment, so that justifies taking the risk.

Venture capitalists usually get preferred stock in your company and make staged investments as the company meets clearly defined and obtainable milestones set forth in the business agreement. Venture capitalists also have rights that come with their investment, such as the right to elect one or more directors to the company’s board of directors and the right to receive various reports, financial statements, and related information.

Angel investors, on the other hand, funded about 57,000 small-business start-ups in the United States in 2007. They tend to offer “patient” money, which means you’ll have more time to let your business grow without the typical pressure that comes with venture capital. Typically, their average range of investment is $450,000 per company, but there is no set amount and they can lend anywhere from a few thousand to a few million dollars.

Generally, investors are looking for a strong management team with relevant experience and the following things from you:

• Proof of a substantial and rapidly growing market.
• A unique product that offers benefits over existing products.
• An IPO candidate or acquisition target.
• A sound business plan.
• Significant gross profit margins of 40 percent or more.

The best way to get your business plan in front of an investor is by way of an introduction. Venture capitalists and angel investors are likely to be more receptive to a proposal forwarded by someone they know and respect. Convince your lawyer, colleague, or accountant to send over your business plan or make an introduction.

Finding Funding on the Web

The Internet has changed how entrepreneurs find new-business funding. It’s made it much easier to find the resources, yet there is more competition now. Here are a few standouts:

• The Small Business Administration (SBA) is one of the best sources for locating funding for a new business. SBA does a lot of the legwork through its member lending organizations by holding workshops and helping entrepreneurs pursue a vast array of funding options. The SBA makes “Micro-Loans” of up to $35,000 with the average loan being $13,000. You can find an extensive list on the type of loans the SBA makes and guidelines on their web site.

• Finance.com matches entrepreneurs with funding from investors and has been recognized as the primary online connection point between serious-minded entrepreneurs and the capital industry. According to their website, they can help you find more than 100,000 potential accredited investors each month both in the angel/venture capital and traditional lending categories.

• Angelsoft.net is a web site where borrowers can go to “capture deals” from a network of angel investors over the web, by e-mail or through a customizable application process that you can integrate into your own website.

Numerous sites on the Web offer advice about how to put a successful business plan together. Check out the Accel site, BizOffice, Bplans.com, or BusinessFinance.com—which allows you to search funding sources, access business credit and manage your account. It’s a step-by-step guide to creating, supporting, and presenting your funding request.