In the remaining weeks of 2017's first quarter, you may be in a hurry to raise capital to pay your bills or achieve your startup's long-term goals.

Odds are good that you won't be able to persuade anyone to write your company a check in a few weeks. But you can certainly make progress on developing a capital plan in that time frame.

The most important thing to consider is that a startup's sources of capital should vary depending on its developmental stage. Here's what I mean:

  • Prototyping. If your company is still working on getting its first customer, it is in what I call the prototyping stage. At this point, a startup is working on a prototype that turns its product idea into a simple, inexpensive version of the product and is trying to match that up with customers. At this stage, your startup should be seeking capital from its founders or possibly grants from local government agencies or university business-plan competitions.
  • Customer base. Once your startup has its first customer, it will want to find more of them. How will you pay for the engineers, sales people, and customer service professionals you need to find and keep more customers? Consider starting with friends and family or so-called angel investors. And if you are able to raise this money, you may also tap the best form of capital of all: operating profits that flow from the gap between the price you charge and your costs to deliver the product or financing from your suppliers in the form of delaying the time that they need you to pay them.
  • Expansion. Typically a company must reach $100 million in sales to go public. If you reach, say, $50 million or $60 million in sales and are breaking even after having penetrated your home country--you could be in a position to reach that IPO sales threshold by going global. To do that, you will likely need to raise tens of millions of dollars from a venture capital firm.

Let's take a look at three of these sources of capital and what it takes to turn potential prospects into eager investors.

1. Winning business-plan competitions

Business-plan competitions abound at universities and incubators. If you want to win these competitions, be prepared to study the specific factors that judges use to select the winners. What's more, those factors might encourage you to change your business strategy, your team, or your business plan to boost your chances of winning.

Even if you don't win after your best efforts, the work you did will make your business better. And if you do win, you could get cash and a chance to work with other exciting startups, get advice from mentors, and house your people in a cool office space.

2. Raising money from angel investors

Angel investors are individuals who got rich--mostly by running successful companies. If you want to raise money from angels, find the ones who know your industry well and see you as a younger version of themselves.

The risk you run in getting outside money is that you could lose control of the company. And you definitely have to be careful in taking money from angels: Make sure they will want to help you grow the company but do not harbor ambitions to take the tiller from your hands.

If you want to win angel capital, convey your insights on key questions such as the size of the total addressable market, what customer pain your company will alleviate, how you will be able to sell customers on your product, the strength of your team, the capital you'll need to reach your growth goals, and your action plan for converting that capital into revenue growth.

3. Getting investment from venture capital firms

Venture capital is the most dangerous form of capital. You have to be sure that the firms you are meeting with really want to invest in your company, rather than use the knowledge they gain from talking with you about your business to help out rivals in whom they have already invested.

What's more, you have to recognize that taking venture capital also means hiring a boss--at least one partner from the venture firm will join your board as a condition of investing. To get the right boss, interview other CEOs who have taken funds from this partner--you want one who helps out when times get tough, rather than pushing out the CEO.

If you want to persuade that partner to invest, you need to have good answers to most of the same questions that you have to answer to win angel investors. But you'll also need to tell the venture capitalists how you will use their money to grow enough to take the company public.

Match the capital source to your company's stage of development and dodge the nasty pitfalls along the way and you can win the cash you need to profit from your entrepreneurial dreams.

 

Published on: Mar 2, 2016