Many new entrepreneurs have a skewed view about venture capital funding. Some believe that a great idea and lots of passion and enthusiasm are all one needs to convince a VC firm to become partners in a new business venture. However, VCs particularly scrutinize fresh entrepreneurs – especially if you don’t have funding and a track record already.
To separate fact from fiction, a VC firm will not lend any money to a new company that does not already have some form of small business funding.
If you read that correctly, then yes, you need money before you can get money. VCs want to know that you are taking a financial risk yourself. Of course, all entrepreneurs start by bootstrapping, but you still need more business capital before you approach a VC to ask for more money.
Where can you get it? There are many forms of startup business capital. The top three self-funding capital types are:
- 401(k) – Either through your 401(k) or other types of retirement fund, you can take loans against the funds to invest in your start up. Though it’s not recommended, you could even withdraw a portion or all of your fund to get startup capital.
- Savings – If you have substantial savings, this is a good way to show investors you believe in your business idea.
- Friendly Loans – Also known as “Friends and Family,” or F&F loans, these are also a common way for start ups to get their seed money. If you can encourage the people close to you to get onboard, VCs might take a second look at your idea.
Third Party Funding
Other forms of small business funding may come from other outside sources before you approach a VC firm. Here are the top three you might consider:
· Corporations – Though the last few years have been modest, corporations are known for investing money into startups. They know that VCs can make a substantial return on their projects – and so can corporations if they invest wisely. Approach corporations in the industry of your new startup. For instance, if you have a technology idea, you might talk to Dell, Cisco, or Microsoft for a stake in your new business.
· Angel Investors - “Angels” are similar to VC firms, except they are typically wealthy individuals who make it a point at helping startups. Angel funding can certainly be a good step toward obtaining venture capital funding, especially since angel investors are well suited for funding smaller amounts of capital.
· Incubators – This type of initial investor is one who may not invest cash, per se. However, you could get valuable technical or business consulting, bookkeeping or accounting services, donations of office or research space, and even networking help.
To get to the next step of business capitalization, you need to have investors and/or your own money on board. Get to these types of initial business funding and then take your new venture to the VC firm.