One of the most common questions that I hear is how did you fund your start up?
I never get tired of hearing that question because for year’s it was the question I was asking. It is one of the largest hurdles that a new entrepreneur faces. I decided to run the question by a few friends who have seen great success with their startups.
What I found out from their experience and my own was that; A majority of start-ups are funded through the three F’s:
• Friends
• Family
• And Fools
It seems like entrepreneurs have a ravenous appetite for cash. Startup’s seem uniquely able to devour money, so funding and financing are always huge issues for entrepreneurs. Fortunately I have narrowly avoided having fools invest in my business, but I have had both friends and family invest in my success. Tom Haarlander who I talked with about this common entrepreneurial problem said he’s received financing from all three types of early investors. Tom started a health care company while also attending Belmont. He has since sold that company and is focusing his attentions on international manufacturing. His business is a capital-intensive business and I wanted to learn more about how he raised money at such a young age.
Tom said although he has taken money from everyone in the three F’s that he prefers to begin his businesses through self -funding. According to him,
“Self funding is always the easiest way for a venture to get started. It also allows me as the entrepreneur the ability to avoid complications that come with bringing on outside partners, making those initial planning stages much easier and easing complications of exit strategies. But the Entrepreneur needs to think how this limits the ventures growth potential as well as the personal risk you as an Entrepreneur are putting on yourself.”
Self funding certainly can be limiting. I know that when I launched CandyGalaxy while still in college there is no way it would be where it is today had it not been for outside capital. As a twenty year old I simply did not have the resources necessary to purchase inventory and pay for the warehouse and staff necessary for my business.
When you’re working through your finance plan and deciding how you should take your business to market. Consider first your personal appetite for risk and then consider what you may be giving up by taking making the decision to take on investors or go it alone. If your looking at taking money from friends or family never underestimate the strain that the investment could have on your relationship. A professor of mine once said to never ever take money from anyone that they could not absolutely afford to lose, and that applies even more stringently if they are someone that you know personally. That means tapping out your aunts uncles and parents beyond what they can afford for your venture is probably not the smartest or most responsible decision.
For my business I had to make the decision to give up equity and control in exchange for the capital I needed to get the business where I wanted it to be. Everything in life seems to involve some kind of trade off. If you’re planning on raising capital through any method think through not just the immediate need, but also the long term plans and goals for the business. The first time that I was in a position to raise capital I actually turned it down. My partners and I were offered $50,000 in exchange for a significant equity position in our company. At the time I was eighteen and the start up had approximately zero dollars in revenue at that point. We were all over the moon with excitement at this “huge opportunity” that dropped in front of us. However a professor of mine sat my team and I down and walked through the deal piece by piece.
After talking about our “ultimate” plans and goals for the business we realized that that investor at that time did not have what we needed to bring the business where we wanted it to go. He forced us to think through what our business really required and why that investor’s cash offer was not necessarily what we needed. We needed warehouse space as well as inventory & logistics expertise. The cash offer would have run dry in three months and we would have found ourselves back to square one, but with less ownership then we started. It’s really hard not to let the $$ signs cloud your vision when investment money is on the line, but you need to think about potential investors as more then money bags, you have to think about additional value that those investors can add to your business. I’ve often found that the “bonus” expertise or connections that investors can bring are often worth far more then the actual cash that they may bring to the table.