Startup Funding: Developing a Strategy with a Part-Time CFO
There are many entrepreneurs and business owners who have great ideas for new businesses. Many of them even have experience with business operations and management and expertise in a particular industry or with a specific product or service.
What keeps many of these prospective entrepreneurs from actually launching a startup business is money. This is where the proverbial rubber meets the road. A great business idea or a revolutionary new product or service will remain just that — an idea — without enough startup funding to get the business off the ground.
Sources of Startup Funding
So where should you go in search of startup funding to launch a new business? The main sources of startup funding for new businesses are an entrepreneur’s own personal savings, friends and family, equity investors, and banks. Banks provide business loans, which must be repaid with interest, while startup investors provide equity in exchange for a percentage of ownership in the business.
Equity investors include venture capitalists (VCs), “angel” investors and family members and friends. VCs are professional investors looking to earn big returns on capital. Therefore, they are usually only interested in providing startup funding to new businesses with high growth potential. Angel investors are wealthy individuals looking to invest in new businesses they have a personal connection with and want to support. Angels often group together so they have larger amounts of startup funding to invest.
Before approaching equity investors, it’s important to understand the concept of equity dilution. Every share of business ownership that you distribute to investors dilutes your own percentage of ownership in the business. So while equity doesn’t have to be repaid as a loan does, the cost of equity can eventually end up being much higher than the cost of debt when used as startup funding.
Banks offer a wide selection of different types of startup business loans, along with other financial products and services your startup business may need. You may want to talk to several different banks as you search for startup funding, including large super-regional banks, midsized banks, and small community banks. Larger and mid-sized banks usually offer more different types of loans, while smaller community banks usually provide a higher level of personalized “hands-on” service.
In addition to traditional banks, online lenders such as OnDeck, Kabbage, and LendingClub also provide startup funding for new businesses. These marketplace lenders usually provide fast loan approvals (sometimes in minutes) and request minimal financial information from business borrowers. However, they generally charge higher interest rates and make smaller loans than traditional banks are willing to make.
One common challenge with raising equity for startup funding is the time it can take to complete a round of investor financing. Startups usually need money quickly to fund working capital and meet other startup expenses. One solution is to issue convertible debt to investors instead of equity shares. This will enable you to put your startup funding to work right away instead of waiting for the completion of a round of funding.
Creating Your Pitch Deck
Before you begin your search for startup funding, you should spend some time creating a pitch deck. The goal of the pitch deck is to get investors excited about investing in your business by providing a high-level, 30,000-foot view.
Some entrepreneurs think that a pitch deck should contain dozens of pages and be packed full of complicated graphs and charts. However, the most effective ones contain no more than a dozen pages and minimal graphs and charts, since these can be hard for investors to understand on a glance. Instead, it would help if you used lots of bullets, so it’s easy to grasp the main concepts quickly.
A pitch deck should usually cover the following areas:
1. Business vision
Your vision should be more than just selling products or making money. Share with investors your passion for why you want to start your business.
2. Financial model
Investors will want to see your projected sales, revenue, expenses and profits. Stay focused on the big picture and bottom-line numbers in your pitch deck — save the details for later.
3. Target market
Describe your market’s size and scope, including where potential customers are located and how much disposable income they have. Having a narrow target market is usually preferable to having a broad market because it’s easier to target your sales efforts.
4. Management team
Include the relevant background and experience of your key executives and managers to help give investors confidence in the people they’ll be working with.
5. Sales and marketing strategy
Share with investors the highlights of your sales and marketing plan. For example, what are the best sales channels for your products and what marketing vehicles do you believe will be the most effective?
What keeps many prospective entrepreneurs from actually launching a startup business is money. A great business idea will remain just that — an idea — without enough startup funding to get the business off the ground. The main sources of startup funding for new businesses are an entrepreneur’s own personal savings, friends and family, equity investors and banks. Before seeking startup funding, you should spend some time creating an effective pitch deck to engage investors in conversation about your business and get them excited about investing. An on-demand part-time CFO or project CFO acting in the role of startup CFO can help you devise a strategy for successfully raising startup funding.
Arthur F. Rothberg, Managing Director, CFO Edge, LLC
The Value in Bringing in a Part-Time Startup CFO
Startup Accounting: Eight Areas a Part-Time CFO Focuses On
How to Create an Effective Pitch Deck
How to Create a Business Financial Model
Understanding Equity Dilution in Startup Businesses
Convertible Debt: An Option to Structure Startup Financing
Six Tips for Allocating Startup and Seed Capital