January 16, 2016
Looking to start a business? If you’re anything like me, when I started out I was terrified. First off, I had watched way too many episodes of Shark Tank and thought that raising capital for my business was luck of the draw. After all, I had seen many business owners and startups pitch their idea or concept. It seemed like two entrepreneurs with similar cash-flows, business acumen and proof-of-concept would get two wildly different reactions from the sharks.
So if I could go back and tell myself one thing in regards to financing my dreams, it would be that there are many, many ways to fund a startup and I needed to accept that it wasn’t a simple yes or no, but a question of which method was the most appropriate.
Valuations: Where the Trouble Starts
Most people think of raising money for an idea as a simple trade of funding for equity. The sticking point is the valuation of your company. As you've likely seen on Shark Tank, there are a ton of different models for valuing an idea or concept. After all, there are a variety of variables that effect a valuation.
What stage is your project, startup or company in? How big is the market you’re going into? Is there anything proprietary about your product or service? How difficult would it be for someone else to duplicate your success?
In general, entrepreneurs love to value their business based on potential and the sweat-equity they’ve invested into making their dream a reality. However, investors and venture-capitalists are looking at the performance of the team or company to date. Just because there’s a potential to make some big money in the future, doesn’t mean that the company’s valuation should be impacted by the future. An investor is investing in the here and now of the company or brand.
This means that from the outset, founders and investors are looking at the same problem from wildly different perspectives. So, if you’re looking for an equity deal, prepare to meet in the middle on your valuations.
Debt: Evil for Startups, Critical for Scale
If you are an entrepreneur without money, you’re a dreamer. Money is the key to turning dreams into reality, or at least having a chance to go down the path and create a meaningful proof of concept. If you lack funds to kick off your company, you have a few options.
One, you can take on debt. While a bank would probably have difficulty funding a startup, there are venture-capital firms that are willing to at least hear pitches from startups. The difficulty you’ll face though is that you’ll have to give up such a big chunk of your company at an early stage, that you may end up doing it more harm than good in the end.
If you fail to attract VCs and investment banks, you can turn to secured debt to get access to the funding you need. Just realize that if you go down this path, you’re taking on personal debt to finance a business. If you feel stressed about becoming successful now, wait until you get to the point where cash reserves are running low and your car is about to be repossessed because you hit a bump in the road.
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