Make sure you are well funded

In the past, I had many clients that wanted to start or expand their businesses but struggled on the equity piece. Either they had little to no money or had too much debt to attract more money. Typically, bankers and investors want you to have at least 20% of what you say you need. This can be in the form of cash on hand, money already spent on the business, and assets you are personally contributing to the business.

On the rare occasion, I have seen business owners raise money without contributing personal cash. There are severe cautions when going that route including whether the owner will maintain control of the business. Usually I advise people with no financial contribution to hold on and save up. Or, if the need is great enough, consider pursuing venture capital financing where investors are more amenable to risk (although this type of equity financing is hard to come by).

When starting a new plan for your business, the greatest thing you can do is start off well funded. Equity financing is just another way to raise funds for this purpose. Equity investors come in different forms:

• yourself (always the best way)
  
• family and friends (can be murky - get everything in writing)
  
• local, regional, or national investment groups (easier to come by than you think)
  
  
  
  
• venture capitalists (I'll discuss this more next week)
  

Most companies create a minimum investment amount for those interested in investing funds. One interesting strategy I recently heard about sounded similar to the Obama presidential campaign fundraising strategy - recruit new investors that contribute small amounts with the expectation that they will do some promoting to your target customer base. Genius!

Another good one I have heard is from Seth Godin. This business guru suggests offering investors payback via residuals from sales versus the typical equity payout of dividends. This model is similar to many entertainment deals and really offers a good alternative for attracting investors, especially if your profit margin can handle it.

Some tips you should consider when pursuing equity financing:

1. Be sure you know what you want out of your investors (and what you don't want). If you want full creative control, make sure that is explicit in your agreements so that potential investors will not think they can have full say as well.
2. Think about what knowledge, connections, and other support investors can contribute to the firm in addition to their funding. One of the lessons from Shark Tank - do you really want to turn down an investment amount less than what you want but coming from someone that can help skyrocket your business?
3. Be persistent in attracting investors. Reach out to your networks to let people know what is going on and what you are looking for. Definitely touch base with entrepreneur support resources since they may be connected to just what you need.
4. Consult with a lawyer to draw up agreements and other paperwork required to interact with investors. You want to protect your rights as the creator and founder of the firm. How much control do you want to share? Be selective in your choice of lawyer. He or she must be:

• familiar with your industry, 
• understand how to deal with investors
• able to speak to you in terms and attitude that you can relate to and understand
  

I remember trying to work with a client and his partners who had previously raised enough money to purchase a radio station yet did not have the money to operate it. They were coming to us for additional financing but they had no cash flow since they were never able to hire sales people to sell ads. All of their employees were volunteers and therefore unreliable. It made for a mess for this business. It could make for a mess for yours if you do not start out well funded.

Do you have any horror stories of starting a firm with little to no funding? What are your success stories for attracting equity financing?