Funding Your Business

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Overview

Funding a business is seminal to the long-term success of any enterprise, large or small. In fact, there is a strong argument that the proper funding sources and strategy are more important than the business’s founding core concept. The world is replete with start-up examples where the core idea or product that starts a business is merely transitional to the value proposition that eventually drives a business through much of its lifetime. Netflix, for example, started as a simple DVD mail order business with the founders believing that video was likely to be a rapidly evolving technology. It is the source of funding or “fuel for the business” that allows the business to navigate through from a conceptual “back of the napkin” start-up to a thriving and sustainable enterprise. The team at Netflix had access to enough funding to acquire a customer base, navigate that base through online delivery, and eventually become a content developer themselves.

“Funding,” however, is a broad, unspecific term that encompasses a spectrum of ways to feed the appropriate resources to a start-up business. There is the very direct and simple: identify a customer and offer them a product or service that is, through circumstances, already available to the business and get them to pay for it on profitable terms … do you remember when you used your family’s lawnmower to cut a few lawns in the neighborhood? A start-up, however, must focus on growth, and it is often appropriate to make an upfront investment to bring the business an advantage, for example, using short-term credit to buy a riding mower that allows you to take on twice as many customers in the neighborhood. As the vision expands then too, must the resources. When you are then ready to create a lawn care franchising business, it is time to explore the choices available for long-term debt or equity so you can finance a complete business infrastructure.

This Skill will expose you to choices available when starting or bringing a business to and through the various growth stages. We will provide frameworks to develop a business funding strategy and identify appropriate sources of that funding in the stages of growth from the classic phases of “friends and family” to sources of grants, angel networks, and eventually venture capital. You will learn the sources, terminology, and deal structures that can be considered. These tools will allow you to better understand the motivations of the various funding sources and the cost of capital from those sources. With those considerations in mind, you will be better prepared to align the interests of the funding sources and deals with your business and thereby increase the probability of sustainable, long-term value creation.

The figure shows a set of steps that gradually attains higher altitude. From the bottom, the steps are as follows: Founder, Friends, Family; Innovation Grants; Seed/SBIR Funds; Angels, Angel Networks; Venture Funds; Institutional Equity; and Loans/Bonds. Above this set of steps, there is a line that begins with a point and ends in an arrow. There are two sets of start-up stages, one above the line and one below the line. The stages above the line are arranged in a row along the line in the following order: Discovery, Proof of Concept, Product Design, Product Development, and Manufacturing/Delivery. The stages below the line, arranged in a similar fashion, are as follows: Ideas, Pre-seed Funding, Seed Funding, Start-up Funding, Expansion, and Operation Cap.

Figure 1. Start-Up Stages and Corresponding Funding Sources
A figure shows the start-up stages and the corresponding funding sources.

Source: Author.

The Skill will also discuss alternative funding sources (e.g., crowdfunding) and structures (e.g., SAFE’s and KISS’s) and provide you with tools to evaluate the trade-offs in employing such alternatives. We will survey the ways in which early start-up businesses can be valued and use that to create and evaluate deal structures appropriate to different start-up situations. Women and minority founders often face particular challenges with funding. Awareness is rising around this issue, and we will explore some resources and options available to improve funding success for these groups.

After completing this Skill, at a minimum you will be familiar with the terminology of start-up funding. For those interested, however, we will provide a full toolbox that can be used to create a funding plan and strategy that will align the founders and funders of a business from inception to a successful outcome for all parties.

Further Reading
  • Zero to One: Notes on Startups, or How to Build the Future by Peter Thiel
  • Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist by Brad Feld
  • Founder’s Pocket Guide: Startup Valuation by Stephen R. Poland
  • Founder’s Pocket Guide: Term Sheets and Preferred Shares by Stephen R. Poland
  • Startup Evolution Curve from Idea to Profitable and Scalable Business: Startup Marketing Manual by Dr. Donatas Jonikas