As an entrepreneur seeking funding for your business, one of the crucial questions to address is the type of capital you should raise. There are various options available, each with its advantages and disadvantages. It is essential to carefully consider your business’s needs, growth plans, and financial situation before deciding on the type of capital to pursue.
“As Jim Rohn famously said, ‘Time is more valuable than money. You can get more money, but you cannot get more time.'” – Jim Rohn
1. Equity Financing: This involves selling ownership stakes in your company to investors in exchange for capital. Equity financing can be obtained from venture capitalists, angel investors, or even through crowdfunding platforms. The benefit of equity financing is that it does not require repayment like debt, and investors often bring valuable expertise and connections to the table. However, selling equity means giving up a portion of ownership and decision-making control.
2. Debt Financing: This involves borrowing money from lenders or financial institutions and promising to repay the borrowed amount, usually with interest, over a specified period. Debt financing can be in the form of bank loans, lines of credit, or bonds. The advantage of debt financing is that you retain full ownership and control of your business. However, it also means taking on debt obligations, and failure to repay the loans could lead to severe consequences.
3. Bootstrapping: Bootstrapping refers to funding your business using personal savings, revenue generated from sales, or funds from friends and family. This approach allows you to maintain complete ownership and control, but it may limit the scale and speed of your business growth due to resource constraints.
4. Strategic Partnerships: Collaborating with other businesses or investors through strategic partnerships can provide access to capital, resources, and market reach. Such partnerships can be mutually beneficial and enable both parties to achieve their business goals more efficiently.
5. Grants and Subsidies: Depending on the nature of your business, you may be eligible for government grants or subsidies. These sources of funding do not require repayment and can be instrumental in supporting research, innovation, or specific social or environmental initiatives.
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This table shows the typical sources that are best based on your company’s stage of development. Your mileage may vary.
| Friends & Family | Angel Investors | Venture Capital | Crowdfunding | |
|---|---|---|---|---|
|
Usually Called |
Friend and Family Money |
Seed or Bridge |
Series A, B, C etc. |
Several types depending on size. SEC regulated. Types are CF, A which have different requirements for reporting, etc. |
|
Employees |
0 to 10 |
1-15 |
10+ to 500 |
0 to infinity |
|
Annualized Revenue |
$0 to $500K/year |
$0 to $2M, more the better. Path to profits with scale clear |
Rarely $0 or less than $500K annually, but can be any amount. |
$0 to $2M, more than that you may have better sources that can be more helpful. |
|
Product Maturity |
Idea to prototype |
Close to or have an MVP already. |
Working product with likely improvements in the pipeline but operating at many customers. |
Idea to $2M annual revenues. |
|
Deal Structure |
Convertible or SAFE note with a discount on the next round of 10% to 25%. |
Convertible or SAFE note with a discount on the next round of 10% to 25%. |
Complex and negotiated with many covenants, terms and restrictions including board seats and veto power on many things. |
Whatever you propose, but good investors will avoid unfair deals. Generally, you will/can get a better valuation, because you set it, than professional investors would pay. |
|
Typical pre-money valuation |
$500K to $5M but convertible note gets around the need to set a valuation, so not really needed. A conversion “cap” is usually set. |
$1M to $5M. Could be $10M to $20M in some industries and situations for syndicate deals. |
$5M to $1B depending on many factors. An art and a “what the market will pay” issue, really. Perception can override reality. Look at Theranos. |
Varies wildly based on risk and size of opportunity. Can be a note with fixed interest rate or a multiple (maximum) return. Or equity. Or anything you like that meets SEC crowdfunding laws. |
In conclusion, the choice of capital to raise depends on your business’s unique circumstances, goals, and risk tolerance. A combination of financing options may also be appropriate, depending on your business’s growth trajectory and funding needs. Taking the time to explore and understand the various funding sources will empower you to make informed decisions that align with your business’s long-term vision and sustainability.
“The secret to success is to know something nobody else knows.” – Aristotle Onassis
Bob Norton is a long-time Serial Entrepreneur, CEO and investor who founded six companies with four exits that returned over $1 billion to investors for a 25X ROI. Two others are still in development. He has trained, consulted and advised thousands of Entrepreneurs, CEOs and boards since 2002. Mr. Norton works with companies to 2X to 10X growth rates and valuation using AirTight Management™, the world’s most comprehensive Leadership Operating System. He also helps companies raise capital to fund growth. He is also the Founder of The CEO Boot Camp™ and Entrepreneurship University™ for early-stage companies that have not reached product-market fit and $1M ARR.
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