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DEBT FINANCING

Yes, There is Such a Thing as Too Much Funding
 

You probably need less money to start your business than you think. Here's why.

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When I started my first venture, it took me six months to get a meeting with angel investors. I was so excited about the meeting that I did a 72-hour marathon writing a business plan and financial forecast in order to convince the investors why I needed $2 million to launch.

I showed up at the meeting in a fancy suit and tie, and the first thing that the investors did was rip up my forecast and ask me what I could do with just $200,000. At first I was shocked that they would lowball me like that but, in the end, realized they were right: If I had just tried to raise $200,000 months earlier, instead of waiting months to go after $2 million, I would have gotten to the starting line much faster.

You Probably Need Less Money Than You Think

At my office, my team and I take loan calls everyday from business owners who are stuck within the confines of their company vision and unwilling to stray from their buttoned up business plans. We routinely ask them--before discussing funding options--what they need the money for and why. The reality is that 80 percent of the time, there is a way to do what they want to do for much less money than they think.

Yes, a business owner might need to forego short-term profits by seeking less initial startup capital, but instead he'll be getting commerce moving, and that's the important thing. The best proof of a viable business is active commerce.

Step 1: Prove Your Business Idea

A few weeks ago, I received a call from an entrepreneur who wanted to open up an indoor golf facility. He wanted to open up his own location, equipped with two owned or leased golf simulator machines, and with enough capital to market to attract customers. At the time of the call, he didn't even have a proof of concept, or any customers on the horizon, but he wanted to borrow or raise equity worth a couple of hundred thousand dollars. 

But rather than help him take out a loan that he would regret a few months later, I suggested he approach existing golf stores in his area and pitch his golf simulator for installation there. By piggybacking off of the store's existing customer base, the entrepreneur would drastically cut his marketing dollars, and also achieve a proof of concept in exchange for profit sharing with the existing golf store.

Instead of seeking $500,000 to launch his business, the entrepreneur only needed $50,000 to get started. This is a much more reasonable and attainable goal.

Step 2: Risks of Too Much Funding

If you try to get financing, before you have one customer, you're probably going to have to give away more equity than you have to, or it's going to cost you way too much to borrow the money that you think you need.

If you don't get traction when you try to borrow or raise money, you might be trying to bite off more than you have to. There can be huge benefit if you shrink a grandiose vision, and proceed with calculated baby steps, rather than try to go after too much on the first try.

IMAGE: Corbis
Last updated: Jan 28, 2014

AMI KASSAR is founder and chief executive of MultiFunding, which helps small-business owners find the best business-loan options. Kassar speaks regularly at universities and small-business events about entrepreneurship and access to capital. He has an M.B.A. from the University of Southern California and a B.A. in American studies from Brandeis University. He lives in the Philadelphia suburbs with his wife and two children.
@akassar




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