Contrary to popular belief, business plans do not generate business financing. True, there are lots of types of financing options that need a business plan, but nobody invests in a company program.
Investors need a business plan for a document that communicates ideas and information, but they invest in a business, in a product, and in people.
Small business financing myths:
Venture capital is an increasing opportunity for funding businesses. In fact, venture capital financing is quite rare. I’ll explain more later, but suppose that only a very few high-growth programs with high-power management teams are venture opportunities.
Bank loans are the most likely option for funding a new company. Actually, banks don’t finance business start-ups. I’ll have more on that later, too. Banks aren’t supposed to invest depositors’ money in new businesses.
Business plans sell investors. Actually, they don’t well-written and convincing business plan (and pitch) can sell investors on your business idea, but you’re also going to have convince those investors that you are worth investing in. When it comes to investment, it is as much about whether you are the ideal 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 an essential piece of the financing puzzle, explaining precisely how much money you need, and where it is going to go, and how long it will take you to make it back. Everyone you talk to will expect to see your business strategy.
But, depending on what kind of business you have and what your market opportunities are, you should tailor your funding search and your approach. Do not waste your time searching for the wrong kind of financing.
Where to look for money
The process of looking for cash must match the requirements of the corporation. Where you search for money, and the way you look for money, depends on your company and the kind of money you need. There’s an enormous difference, as an example, involving a high-growth internet-related company looking for second-round venture funding and a community retail store looking to fund another location.
In the following sections of this article, I will 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 often misunderstood. Many start-up companies resent venture capital companies for failing to invest in new ventures or risky ventures. People today talk about venture capitalists as sharks-because of the supposedly predatory business practices, or sheep-because they supposedly think like a flock, all needing the very same kinds of deals.
This is not true. The venture capital business is merely that-a business. They shouldn’t take more risk than is absolutely necessary to generate the risk/return ratios that the sources of the capital ask of them.
Venture capital shouldn’t be considered as a source of financing for any but a very few exceptional startup businesses. Venture capital can’t afford to invest in startups unless there’s a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment has to have a reasonable chance of producing a tenfold increase in company value within three decades. It needs to focus on newer markets and products that can reasonably project raising sales by huge multiples within a brief period of time. It needs to work with proven managers who have dealt with successful start-ups previously.
If you are a potential venture capital investment, you probably know it already. You’ve got management team members who have been through that already. You may convince yourself and a room full of smart people, that your company can grow ten times over in three years.
If you have to ask whether your new business 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.
The names and addresses of venture capitalists are also available in a couple of annual directories:
This organization includes the majority of the California venture capitalists based in Menlo Park, CA, that’s the headquarters of an amazing percentage of the country’s venture capital companies.
Pratt’s Guide to Venture Capital Resources is an annual directory available online or in print format.
2. Type of venture capital: Angels and others
Venture capital isn’t the only source of investment for startup companies or small businesses. Many organizations are funded by smaller investors in what is called”private placement.” For instance, in certain areas there are groups of potential investors who meet occasionally to listen to proposals. There are also wealthy individuals who sometimes invest in new businesses. In the lore of industry start-ups, groups of investors are often referred to as”doctors and dentists,” and individual investors are often called”angels.”