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Raising Money

March 2, 2008

In an earlier post, I briefly discussed the issue of raising money for your business. Capital is the lifeblood of any startup. The more capital you have, the faster you can learn, develop and achieve your vision. I know this is true from first-hand experience. I have raised over $40M from angel investors and Venture Capitalists to fuel the growth of both PayCycle and now Raising money has its downsides, mostly that you give up some control, but if you can raise it from people that you respect, the rewards are tremendous.

If you’re just starting a business, you’ve already relied on your resourcefulness in countless ways. And it’s resourcefulness and ingenuity around raising money that will get you past this stage and through many other stages of operating a business. Lack of funding is often the kiss of death for most young companies. It doesn’t have to be that way.

Whether you are raising funds for the initial launch of your company or securing a second (or third) round of financing, cash is king. You need money to create the product, research and develop several designs, and pay the people who are working with you. And if you need office space, technology, additional equipment, transportation, you’ll need even more money… the list is endless, really.

For most small business owners, funding comes from a combination of personal savings, loans and contributions from investors. As businesses grow, these sources don’t really change. Although larger businesses usually turn to more public options, many entrepreneurs continue to invest personal funds into their businesses at every stage of its life.

Basically, I break down getting funding into two options:

1. Raising money from people and investors

When my business partner, Martin Gates, and I were launching PayCycle and trying to manage the finances, we decided that we would operate for six months and not draw a salary from the business. Then after the first six months, we agreed that if we met our milestones we would work for a year at a $25,000 salary—not an easy task when you consider we live in Silicon Valley and both had mortgages to pay!

To have this plan work, we made sure we had enough money in the bank to cover 18 months. We didn’t want to go 18 months without income, but we wanted to have enough cushion to protect us while we invested capital into the building our product and team; we would rather invest money in the business—building the prototype, setting up the infrastructure for a Web application, and ultimately getting the product to a point that would excite investors.

In addition to the capital we put in, we went to our networks; we approached people who had worked with us, who already felt comfortable with our business backgrounds and reputation. We wanted them to say, “We know you, we know the market and we will invest in it.” Their response was: “We know you and trust you. Go for it.” It was humbling and empowering at the same time.

BTW, we did not ask family to invest in the business.

Mixing business with family is risky. In addition, family is less likely to be able to really judge the opportunity. They are naturally biased. Friends and business associates can judge your credibility more objectively; they ask tougher questions and force you to develop a better business model; and through them you will build a stronger network that will help the business beyond its capital needs. Also, I figured that if I couldn’t get money from people who already knew my business reputation, then I couldn’t get money from anyone.

I can’t stress this enough, getting someone to give you money makes you really evaluate what you are doing. It helps you figure out your business model and hone how you proceed.

Eventually, using the initial seed of money for PayCycle from our network of business friends and colleagues allowed us to hire more people, create a robust marketing program and then go to Venture Capitalists to show that the product had launched and had a market, at about 16 months—two months short of our 18-month deadline. We started PayCycle in August and raised VC money in December of the following year.

By the time I started, it was a very different scenario. I reached out to an even wider network of business colleagues, who contributed based on the success of PayCycle. Having a legacy of success helps considerably.

If you don’t think you have a large network yet (we’ll talk about building and relying on your network next week), don’t worry. Your network is always larger than you think. Of course, you can always borrow from your other assets such as stocks or 401k’s. If you decide to borrow from your 401(k) retirement account, there are taxes and other penalties associated with doing this, so move cautiously. (Click here to read an excellent article on the pros and cons)

2. Raising money from banks or the Feds.

As a small business owner, it’s tough to get a loan from a bank. When it happens, the bank ends up requiring all sorts of covenants that may end up being at odds with growing the business. However, if you are a homeowner, then a home-equity loan or home-equity line of credit could work for you. The loan rates are lower than others (such as credit card) and it helps keep the business in your own hands. It’s risky, though. You don’t want to lose your house.

The federal Small Business Administration is an excellent resource for information on funding sources and as a source on its own. The SBA offers a lending program called LowDoc, which offers loans of $100,000 or less to small businesses of all kinds. In general, the repayment term on an SBA loan is five to 25 years. Check out the SBA site, which includes information on how to find local SBA offices as well as lists of participating banks in your area.

This is by no means the ultimate list so if you are still yearning for more information, check out the myriad of funding sources available out there.

Share your story: How did you raise funds for your business?


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