It makes the world go round!
Greetings entrepreneurial friends! I hope you are well. Today we will be talking about money! I mean, funding! ‘What is it? Why do you need it? Where to look for it!’ etc.
What is funding?
Funding is in essence money for your company. When you first start you need money to pay your bills, your employees etc., but still have no income! This conundrum has led people to seeking external monetary resources, usually in the form of loans. But loans have to be paid back! Usually you either pay back with company equity (i.e. give me X amount of money, and I’ll give you Y% of my company), percentage on the sales (i.e. If you give me X amount of money, for every sale I make, I will give you 5% of that), or straight out pay back the loan with interest. The persons that invest in companies by funding them are called investors, and more commonly Angel Investors. The profile of investors is usually entrepreneurs who are looking to do one of the following:
1. Benefit themselves, by having their money make money.
2. Help the world benefit, locally or globally by investing in companies that aim at making the world better
3. Benefit you, because they may remember how difficult it was for them starting out in their first businesses.
But how much money can I ask for?
As far as invest funding goes, you can follow the steps below to assess how much money you can ask for and how much leverage you have.
Do you remember that previous post where I talked about making a business plan? In that plan you should explain how much money your business is expected to make, and how much it is expected to burn. Depending on your growth model and engine (wow fancy words, we’ll get to them in a future article), you can assess how much money you need, and valuate your business. MATH TIME!
In order to calculate how much your business is worth you need to do the following:
The other form of funding that has become quite popular in current times is CrowdFunding. What this is in essence is pitching your idea to everybody, usually through a Crowd Funding platform, like Kickstarter, IndieGoGo and many more! There is an abundance of Crowd Funding platforms at this moment, usually with specific target groups. After your pitch, people are then able to pledge an amount of money towards your business for a preset reward that you define. It can, again, be equity in the company, but more usually it’s pre-buying some of your company’s products in a better price.
For example, if you would be making a company that makes websites, and you would make a website for $500, you could tell people that, if you pledge $300 I will give you a website for free. While the person is investing in your company, they are getting back a reward that would otherwise cost them more.
|+ Real Estate||- Money you Spend (Accounts Payable)|
|+ Money you Receive (Accounts Receivable)||- Debts (Accrued Liabilities)|
|+ Cash In Hand||- Taxes|
|+ All other assets (IPs, Skills etc.)||- Any other liabilities|
|= Total value of your business|
By doing this calculation you can estimate how much your business is worth at this moment. If you take into consideration future expansion and growth of your business, you can talk about your goal for business value in the next X years.
By using this formula and calculating your business value, you can then ask for money from investors in the form of this example:
You: Hey Mister Mark Cuban! My business is worth $10 million!
Mark: No it’s not, can you show me why it is worth that much?
You: Well if you take a look at this calculations we did this and this and this and that.
Mark: Well ok, it might be $10 million.
You: Ok so, I want to sell to you 10% equity in the company for $1 million!
Mark: What do I get out of that?
You: Well our annual sales are $X with a growth factor of Z, so every year you will be making $X*ZYears
Mark: Shit son, that’s all you had to say
If by any chance you do get to meet Mark, please don’t pitch your stuff like this, be more creative. This was only an example as to why you need to have your business evaluation before you ask for funding!
This is all fine when talking about invested funding, but we also have to talk about Crowd Funding.
As you can very well assume, there is no limitation to what you can ask from when getting funded by the crowd, as the limitation is the rewards themselves. If you are savvy enough and can create rewards that are crowd pleasers, you can get huge amounts of funding, usually with no leverage on your business. But please, don’t pull a Fallout 76 on your followers’ hard earned cash! It’s humiliating and stupid. Always take into consideration what you promise to your fans and if you can actually deliver it!
Why do you need funding?
Well that’s a pretty easy question to answer. To cover your expenses as a company! There are a couple of ways to cover your company’s expenses, each with its merits and drawbacks, so always think well before making any decisions!
A well posed question would be “Wait, so how does funding differ from covering expenses?”. That is a very valid question. You see, funding means to actually get money to cover your expenses, while covering your expenses can be achieved with other means too! For instance, you could have some personal savings that you decide you want to use to cover your company’s expenses for some amount of time. Another choice, if your company is well established, is of course to pay your expenses out of your company’s incomes! Finally, you can choose to go in debt to pay your expenses! Crazy as it may sound, it is actually a valid way of covering expenses, and growing your company, but I would not advise it personally, if you don’t know what you are doing!!
Now that we have made this clear, it’s time to detail what you could be spending the money on.
There are two big categories that you can categorize company’s expenses, Starting Costs and Running Costs.
Starting Costs are one off costs when starting your company, like buying machinery, or equipment, buying out a factory and other things of the sort. The most important thing about this kind of costs is that they are only paid ONCE when the company is starting out! Anything after that can be added in the Running Costs!
Running Costs are the costs that a company has every month. They are usually a variable amount of money that consists of fixed costs and variable costs. Fixed costs are costs that change very rarely and are present every month. A fixed cost could be the rent you pay for a space, property taxes etc. On the other hand, the variable amount of costs includes everything else, from salaries for an ever changing number of employees, energy bills, and more. Please note that salaries could be considered fixed costs if the number of people is small and doesn’t fluctuate much.
As previously discussed, you can opt to use crowd funding to fund your business. There exists an enormous number of crowd funding platforms, each specializing in a different area of business. Beware, however, that most of the crowd funding platforms available, will withhold a percentage of your funding as a fee for their services. Some of the most popular crowd funding platforms are:
I need money, 61!
Ok now you know why you probably need money for your business. It’s important to know how much you actually need (again, go back and revise your business plan!), and how much you can get. In this section we will discuss how you can seek funding.
One option is Business incubators. Business incubators are companies that help new and startup companies to develop by providing services such as management training or office space. Sometimes, incubators, will also help you refine your pitch, and help you get in front of possible investors to pitch your business idea. A quick google search for “Business Incubator [name of area]” should yield enough results for you to start looking into it!
Family, Friends, Yourself
Another popular way of funding businesses is by asking directly for money from family and friends, while also putting your personal savings on the line! This helps mediate things between having to talk with investors who only care about making profits, and having to please crowds when crowd funding. This is the middle ground, where people will of course expect some money back, but mostly want to see you succeed!
Probably the hardest way to get funding is by directly talking with possible investors. To actually get to pitch your idea to investors, you have to be good with public relations. You need to know who you are pitching to and who you want to pitch to! You also need to get in contact with said person and make sure your business pitch is amazing. Even then, funding is not something certain, as you may well understand! Start socializing more, start talking with more people, and start letting go of relationships that actually “drag you down”, if you want to follow this route!
Well this is it for now people! I hope this article helps your understand a little bit better how to get, why to get and where to get funding for your business idea or already existing business!
Until next time,