Funding your venture is not for wimps

Those who have observed a few presidential election campaigns realize that a successful president must have at least two fundamental skills: (1) the skill or ability to get elected, and then (2) the ability to govern if you are elected.

Like political candidates, entrepreneurs soon discover that they must raise capital to support their ventures before they can begin to execute their business plan. Raising capital is like getting elected. In the beginning you must be able to wear two hats: (1) the "investor hat" and (2) the "management hat," and the sooner you can get over the investment hurdle the sooner you can devote all of your energies to building your business.

If yours is an early-stage business without a track record, you will likely find that your startup capital will come from your own personal assets or from friends and family members. Statistics show these sources to be the choice for more than 90 percent of all entrepreneurs. Some entrepreneurs will even rely upon credit card debt to launch their venture. This is risky because of the exceptionally high interest rates and the threat of losing your credit rating and your credibility if you're unable to meet the payment requirements.

Working with friends and family may be your best source of capital, but it is also problematic. These are people whom you will be encountering on a regular basis, and some will want to be involved in business decisions even though they don't have much to offer. It's especially important when working with friends and family to assure that all terms of their financial interest are well-defined and that formal legal documents are signed by both parties. If things don't go well you may find that special relationships will be fractured forever.

You will find that raising capital becomes much easier once you have reached the stage of an emerging growth company. There are multiple sources of funding if you are already profitable but you simply need additional money to expand your manufacturing capacity or to increase your market share.

There are literally billions of dollars available in the investment community to support a company whose growth is limited only by the need for investment capital. However, most of those dollars are earmarked for ventures that satisfy a rather narrow and carefully defined set of investment goals. For example, most venture capitalists will invest only in specific technologies and/or industries where the managing partners have personal expertise or in specific geographic areas, where they will be able to monitor the progress of the company without excessive travel.

Other venture firms will have well-defined objectives as to the amount of the money they want to invest, and your requirements may be more or less than their investment strategy allows. For example, a venture firm with $250 million to invest is not interested in a company that needs only $100,000. If all companies in their venture capital portfolio were that size, they would have to manage 2,500 companies, which may be possible, but is not at all practical.

At the end of the day, you must be able to finance your business before you can even begin to execute your business plan. Like getting elected, this is not a challenge for the faint-hearted, and it requires different skills than those required to manage a company.

David M. Brown is affiliated with the BYU Center for Entrepreneurship. He can be contacted via e-mail at [email protected].

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