You’re not going to make it as an entrepreneur. That’s what the math says, anyway.
A lack of funding early on is the reason why many companies are forced to fold, which is also why venture capitalists are as successful as they are: they offer a product of their own – financial support – in exchange for a stake in the companies they back.
It sounds like a pretty equitable transaction – and it’s worked for billion-dollar companies and smaller enterprises alike. Between 1970 and 2000, venture capital investment created about 7.6 million jobs and $1.3 trillion in total revenue. That works out to about 13.1% of the United States’ entire GDP. These days, those numbers are trending even higher.
That’s a lot of money, which is why the question on many entrepreneurs’ minds is “How can I get some?” Unfortunately, the world of VC money is much more complicated – not to mention much more competitive – than you might expect.
How Does Venture Capital Work?
Many of you are probably familiar with venture capital. In case you’re not, though, it might be useful to go over the basics.
Venture capital is the process whereby private investing firms provide money to unproven businesses in exchange for equity in the company. Make no mistake: venture capitalists are looking for high-potential startups, and you’re probably going to have to work harder to convince them of your merit than you’ve worked on anything else in your life.
Here’s the catch: if you like the idea of remaining independent and autonomous, then VC funds are almost certainly not the answer you’re looking for. You’ll have to decide for yourself what’s more important, and whether or not you’d be better off pursuing an alternative.
So what are those other options? Let’s take a look at three of them.
Other Funding Sources for Startups
There’s something fairly romantic about the idea of approaching a venture capitalist to make a “pitch for the angels.” It’s something you go into knowing that the only things under more scrutiny than your business ideas are your oratory skills. In other words, it’s not enough to have a great product; you also have to know how to present it. And that’s where all too many new businesses fail.
But VC money is hardly your only option. There are other ways to secure the funding your startup needs, and each of them have their own advantages and disadvantages. Here are three of the most important options:
– Personal savings: We may as well start with the most obvious, even if it’s also, potentially, one of the most difficult. Using your personal savings to get your business off the ground can be a significant gamble, no doubt about it. It requires no small amount of faith in your product and your abilities to see it through to fruition.
– Bank loans: Borrowing money from a bank probably sounds like another gamble, and it is. If you have sub-par credit, you’re not likely to be approved, and if you are, you almost certainly won’t get a favorable interest rate.
– Bootstrapping: If you’re into rugged self-determination, you might also consider bootstrapping. This involves simply using the money you receive from each sale to grow your business. This is perhaps the biggest risk of these three options, since you won’t have much of a safety net to fall back on if things slow down. But if you have a great idea and even better execution, it just might work for you.
This decision is not one that you’ll reach overnight. It’s probably going to take some soul-searching. To help you decide, let’s take a closer look at venture capital funding.
It turns out that VC money may not be the Holy Grail that many business owners think it is. Competing for VC money in the U.S. is the definition of a long-shot.
Something like two million new businesses are created in the United States every year, but what you probably don’t want to hear is that only about 600-800 of them manage to secure funding from venture capitalists.
So, given the incredibly small window of opportunity for startups seeking VC money, it’s not surprising that many of them are asking the wrong questions. Among them: “How can I secure VC funding?” The better question to ask is “What are my chances?” As you can see, they’re not very good.
But what about the other 1,999,400 new businesses out there looking for cash? I can tell you about a couple of them.
The thing is, all of this is pretty academic and theoretical without a real-world example. For that, I’d look to a little company based in Carlisle, Pennsylvania (WebpageFX’s hometown) called Menu Drive. They provide the tools that restaurants need to offer online ordering. It’s not a wholly unique idea, but they managed to build their company without a single dollar of venture capital. This is worth mentioning because some of their closest competitors have been taking VC money since their inception, yet it doesn’t seem to have helped them distance themselves from the pack. read more…