Contrary to popular belief, business plans do not generate business financing. True, there are lots of kinds of financing options that require a business plan, but nobody invests in a company plan.
Small business financing misconceptions:
Venture capital is a growing opportunity for funding companies. Actually, venture capital financing is quite rare. I’ll explain more later, but suppose that only a very few high-growth plans with time-management teams are venture opportunities.
Bank loans are the most likely option for financing a new company. Actually, banks do not finance business start-ups. Banks are not supposed to invest depositors’ money in new businesses.
Business plans sell investors. In fact, they do not well-written and persuasive business plan (and pitch) can sell investors on your business idea, but you’re also going to have convince those investors that you’re worth investing in. When it comes to investment, it is as much about whether you are the right person to run your business as it is about the viability of your business idea.
I’m not saying you should not have a business plan. You should. Your business plan is a vital part of the financing puzzle, explaining precisely how much money you need, and where it’s going to go, and how long it will take you to earn it back. Everyone you talk to will expect to see your business plan.
But, based on what kind of business you have and what your market chances are, you should tailor your financing search and your strategy. Do not waste your time searching for the wrong kind of financing.
Where to look for cash
The process of looking for money must match the requirements of the company. Where you look for money, and the way you look for money, depends on your organization and the kind of money you require. There is an enormous difference, as an instance, involving a high-growth internet-related company looking for second-round venture capital and a community retail store looking to finance another location.
In the subsequent sections of this guide, I’ll talk more specifically about different kinds of investment and lending available, to help you get your business financed.
1. Venture capital
The work of venture capital is frequently misunderstood. People today talk about venture capitalists as sharks-because of their supposedly predatory business practices, or sheep-because they supposedly think as a flock, all wanting the very same kinds of deals.
This is not true. The venture capital business is merely that-a business. The people we call venture capitalists are business people that are charged with investing other people’s money. They have a professional responsibility to reduce risk as far as possible. They should not take more risk than is absolutely necessary to generate the risk/return ratios that the sources of the funding ask of them.
Venture capital shouldn’t be thought of as a source of financing for any but a very few exceptional startup businesses. Venture capital can not afford to invest in startups unless there is a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment has to have a reasonable chance of creating a tenfold increase in company value within three decades. It needs to concentrate on newer markets and products that can reasonably project increasing sales by huge multiples within a brief time period. It ought to work with proven managers who have coped with successful start-ups previously.
If you are a possible venture capital investment, then you probably know it already. You’ve got management team members who’ve been through that already. You can convince yourself and a room full of intelligent people, that your company may grow ten times over in 3 years.
If you must ask whether your new company is a possible venture capital opportunity, it probably isn’t. Individuals in new growth businesses, multimedia communications, biotechnology, or the far reaches of high-technology products, generally know about venture capital and venture capital opportunities.
If you’re looking for names and addresses of venture capitalists, start with the internet.
The names and addresses of venture capitalists are also available in a couple of annual directories:
This organization includes most of the California venture capitalists based in Menlo Park, CA, that’s the headquarters of an remarkable percentage of the nation’s venture capital companies.
Pratt’s Guide to Venture Capital Sources is an yearly directory available online or in print format.
Venture capital is not the only source of investment for startup businesses or small businesses. Many companies are financed by smaller investors in what’s called”private placement.” For instance, in some areas there are groups of potential investors who meet occasionally to listen to proposals. There are also wealthy individuals who occasionally invest in new businesses. In the lore of business start-ups, groups of investors are often known as”physicians and dentists,” and individual investors are often called”angels.”