Where Does the Money Come From? Funding a Personal Care Start-up
It’s true: Making money in business means first spending money. Producing something consumers will buy from you means you’ve developed a viable product, tested it, packaged it, arranged for fulfillment, and more. These steps incur costs — costs you have to address well before you are generating income from product sales.
So where does the money come from? How do you grow a company from idea to execution and from putting money in to seeing a return with money out? Start-ups have a few options to secure the funding they need.
The Difference Between Debt and Equity
Sometimes, backers will want to support your venture with a loan. Usually that means making regular interest payments (as with any loan) and then repaying the loan in full at a set time (debt maturity). With debt, you aren’t surrendering any ownership in the company, but you are obligated to repay the loan.
With equity, you’re exchanging a share of ownership for funding. This can be a tiny share, even less than 1%, or up to half ownership. The investor can then, at a later date, cash in their ownership.
With significant investments and ownership shares, the investor can require a seat on the board of directors as a way of protecting and overseeing their investment. The good news (if you can call it that) with equity is that if the business collapses, you aren’t on the hook to repay anything. On the other hand, giving up ownership, even a little, means giving up some control.
Bootstrapping
For companies just getting started, the first source of money is almost always from bootstrapping — using your own funds to cover costs. Self-funding is an easier, less frightening step to take when you have a viable product you believe in, and a sensible strategy to achieve success.
Having skin in the game from bootstrapping works in your favor when you’re ready to seek funding from outside investors. They like to see that kind of personal commitment.
Angel Investors
For almost every start up, bootstrapping is not a long-term solution because there comes a time when the next growth phase requires more investment. Angel investors, also known as private investors, are very helpful at this stage and are often found in your circle of friends and family. They tend to be high net-worth individuals, or at least they have something they can contribute to your cause.
Investments from angels typically range from $10,000 to $100,000. While angels are certainly eager to see a return, their involvement is usually less formal and demanding than what you’d experience with venture capital firms. In many circumstances, angels are investing in you, rather than your company — they know and like you and want to be supportive.
Finding angels and securing funding from them really comes down to looking and asking. There are likely individuals in your network who have the resources to support you, so ask! If you’re not finding any, ask your network to introduce you to the right people. Get involved with your local chamber of commerce or other forums that involve business leaders.
When it’s time to make your pitch, be ready to confidently present your plans and answer questions. Don’t overwhelm with technical details, but rather focus on the market need you’ve identified, the solution you’ve developed, why it’s better than the competition, and why you believe your venture will succeed. If your potential angel needs to know more, they’ll ask.
Business Loans
If private sources of funding aren’t available, or don’t provide sufficient resources, you may have to opt for a loan with a lending institution. That used to mean a bank, but in recent years has more often meant online alternatives, like Kabbage, which offer financial backing to small businesses.
There are several funding options available to small businesses, such as lines of credit, SBA loans, short-term loans, equipment financing, and a commercial mortgage. At this stage, if you don’t have one yet, you will definitely need a thorough business plan. If you can’t explain how your amazing product(s) will actually make money, lending institutions will be skeptical that you can repay the loan. Hopefully by this point you’re already operational and generating revenue from sales so you can show some traction.
Venture Capital
Once you’ve established a track record with a customer base and positive initial revenues, you may decide you want to pursue venture capital. Think of it as angel investors on steroids. Whereas angels are individuals investing their own money, individuals combine their resources in a venture capital fund, and the VC firms invest that in your company.
Different stages of funding have names. For example, when angels invest in your company, it’s generally considered “seed funding,” and the first stage of VC funding is called a “Series A round,” because of Series A preferred stock offered by the company to the VC firm.
VC funding involves determining a valuation of the company. Many factors are involved in this process, including company management, operational results, market size, and risk. Because of the work involved in this process, smaller investment amounts are usually not worth the legal and financial expense due diligence on the part of institutional investors. VC firms typically have a minimum threshold of how much they will invest, or in other words, how large of an ownership stake they want in your company. VCs tend to “purchase” 10% to 30% of a company.
It can be very exciting and gratifying to have a venture capital firm invest in your business, but it also means surrendering some control, or even a lot. We at the HatBerg Collective have seen some start-ups thrive with minimal outside investment, and we’ve seen some make savvy use of VC funding. If your company needs an infusion of financial resources, the HatBerg Collective can advise you on appropriate paths to pursue.
Chaz Hatfield
Co-founder
The HatBerg Collective
