How to Raise the First Million

Brent, great question!

I understand that it can be very difficult to grow your business with limited funding (personal savings, credit cards and friends & family).

So, I often guide entrepreneurs to look at:

1) Banks/Debt

2) Angel Investors

3) Venture Capital

3) Strategic Partners

4) REVENUE

BANKS/DEBT

Let's start off and talk about banks. Commercial banks are one of the largest sources of credit to small businesses. Bank debt can also be on the least expensive funding sources available. Here are 2 key debt drivers:

• Performance: are your operations sufficient to "service" the level of debt? Are you growing? Are you profitable, or close to it? If no to any of these, don't waste your time.
• Assets: can you borrow against them? i.e. accounts receivable, contract revenue, equipment, etc.

The bank will want to review financials with projections and look at your work experience when making their decision.

But here are a couple of things to keep in mind:

1) Most debt needs to be secured by assets in the company

2) If the assets cannot be adequately secure a loan, personal guarantees are generally required, which means IF THE BUSINESS FAILS, YOU ARE ON THE HOOK!

ANGEL INVESTORS

As background, angel investors can be individuals or a group of individuals. Often they are successful entrepreneurs who have sold their business or retired executives with significant experience. Usually they are investing in an area of expertise and do not require large ownership positions.

VENTURE CAPITAL

Thinking about this, there are some advantages and disadvantages with taking venture capital. Here are a few of them.

Disadvantages:

• This is typically not the answer for a company that wants to stay private and independent
• You must give up ownership
• And the entrepreneur needs to make sure there is a good cultural match between the investor and company

Advantages:

• There is a very good availability of venture capital to companies with a promising future, but limited currrent profits.
• The VC should get active and help recruit other board members and key members of the management team (as needed)
• The VC helps by offering strategic guidance throughout the company building process and can help with the exit
• Good VCs also may get active in making intros to customers, partners and other key investors

STRATEGIC PARTNERS

Some larger companies will often make a strategic investment in a smaller company. As an example, Red Hat raised money from Dell, Intel, IBM, Compaq, Oracle, Novell, SAP and Netscape. That is taking it to the extreme, but even local companies like ChannelAdvisor took in some money from eBay in addition to VCs like our firm. With this comes some very strong advantages:

• Capital
• Advice
• Customer introductions
• Helps strengthen relationship (credibility in sales)
• Could lead to a potential exit
• Sometimes, the strategic is less valuation sensitive

REVENUE

Some may laugh that I put this in as a "capital raising" option, but the least costly source of capital is the one you generate yourself: revenue.

Cutting expenses and running a lean company also helps.

I hope all of this helps. I think it is important to do additional homework on this and realize that all capital isn't the same. Whatever you choose, find the bank, angel or VC that can add the most value to your business - well beyond their check! And don't get paralyzed raising money - it can be a time consuming process.

Stephen – As with most questions in this space, I think the right answer is "it depends."

Investors will certainly want to see the entrepreneur invested and at risk (which doesn’t always have to mean cash). But the pace and scale of corporate development and fundraising needs to make sense within the context of the business model and competitive landscape. An entrepreneur spending two years developing a product and winning small customers could make sense for a technology in a market where the commercial infrastructure isn’t ready for it. In other cases, accelerating competitive advantages or barriers to entry that require more capital could be the most appropriate way forward where the chance to capitalize on the idea could be fleeting. Two shades of grey… when it comes to financing companies there isn’t much black and white, things just have to make sense.  

Jason, one of the things we're struggling with right now is how to meet investors. Neither my partner or I are connected with the type of people that would be an investor -- we're just a couple of guys with a great idea. We're self-funded now, and are starting to look for the next round -- either friends and family or an Angel. How do youfind the right investor? I've downloaded the "Approaching Angel Investors" deck from the site, and that's definitely provided some leads. But, I'm curious, how did the 2 people you invested in approach you? How did they know you might be a potential match before they approached you? Were they introduced by someone you trusted?