As financial professionals, we often get asked, “how can I attract funding and other sources of outside capital?”
Having had the good fortune to provide nearly 20% of all the privately funded, venture-backed companies nationwide with our services, we know the path to fundraising well. The key elements that you need to consider cover several options around funding, including alternatives to outside funding.
Before you seek outside investment, you should consider what your business, product, and field are and whether you can make a go of it financially on your own. Whether it’s from personal savings, time invested, or other self-generated resources, bootstrapping is an option early on.
There are three reasons why you should be pursuing outside investment, and those are the main signals that fundraising is worth pursuing.
Why You Should Seek Funding
There is the meta reason and the specific, the meta reason being to ask yourself if funding can substantially move your company forward in a way that you couldn’t otherwise.
The specifics are one of the following three ways:
- To accelerate growth
- Network expansion
All of these are heavily dependent on how far along you are, what you’ve done so far, and where you’re going.
Different Investing Stages
If after checking that one or more of those areas is ripe with possibility that an outside capital infusion could greatly enhance, then here are the levels of investment and what you can expect of each.
Friends and Family
At this personal stage, it’s exactly what it sounds like—seeking investment from your close network, friends, and family. Maybe even a friend of a friend who is a high net-worth individual.
Some things to consider: You will have a low valuation at this stage. There is realistically a 90% chance of failure this early on. Every entrepreneur believes this doesn’t apply to them. My advice to you is because of the personal nature of this round and the high failure probability, make sure to not take any investment from a relationship that would be heavily jeopardized by that possibility. Protect your relationships first.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, an outsourced financial services firm that provides early-stage companies with day-to-day transactional accounting, CFO service, tax, and valuation services and support. He’s a financial expert and startup mentor whose passion is helping businesses focus on what they do… (read more)
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