Tuesday, July 29, 2008

Money and your Startup Business

What is the most common reason small business fail? Lack of adequate funding. Money may not buy happiness but it is critical for the success of any business. Cash is king and don't confuse cash with profits. Your income statement may show a healthy profit and your bank account show a deficit.

Say Startup Finance to most entrepreneurs and they immediately think of venture capital. Venture capital isn't appropriate for probably 99% of startups. In 2007, according to PriceWaterhouseCoopers venture capital survey, only 3,914 companies received venture capital in the United States, and the majority of the funding was invested in established companies.

The August issue of Entrepreneur magazine states that $29.4 billion was invested in 2007. Sounds like a lot, but private investors, or angel investors, account for about ten times that investment amount and in quite a few more companies. Angel investors also invest in earlier stages, often when there really isn't a company, just the management team and a business plan.

Since angel investors have no reason to report their investments to the public, it's difficult to estimate exactly what their contribution is. However, the Center for Venture Research at the University of New Hampshire says that angel investors invest 30 times more money than VCs. And while the average investment per company for venture capital is roughly 10 million dollars, angels invest about $75,000 per company per investment according to a study done by Profit Dynamics.

So why do entrepreneurs often focus their capital raising efforts on venture capital firms? Probably the most common reason is that they're easy to find. Most VCs have websites where they not only highlight their previous investments but outline what types of companies they currently are looking to invest in.

Besides venture capital and private investors, there are other sources of capital for startup businesses. Loans, family and friends, and credit cards comprise some of the more easily accessible sources of capital. Many small business people use the equity in their home to fund their business. Or use a portion of their savings or equity investments.

What about Business Startup Grants? According the Small Business Association there are no grants for businesses. What they do offer are SBA backed loans that can be acquired through traditional lending sources. Any grants awarded by the US government are on a competitive basis for specific purposes and usually are related to research.

Private foundations offer grants, but most often the grants are awarded to nonprofit organizations.

Startup Funding is important to the long term success of your business.


Lanla said...

Great insights. One reason for the failure of many small businesses is that they undercapitalize their business. Therefore, it is important that you know how much money you will actually need to start and to run your business until you reach your break-even point—the point when your sales revenue equals your total expenses.

Direk@7downloads said...

I couldn't agree more..