If you’re like me, you’re a service provider (e.g., a freelance writer or editor), and investors are not something you necessarily need in your business mix. However, if you’re part of a team that’s starting a business that requires infrastructure, machinery, or materials, you might find yourself in need of money beyond what you and your partners have in your bank accounts. The Space Foundation’s Space Commerce small business workshop also covered this topic. Need money to get your business started? Read on!
Sources of Investment
The presenter for this topic was Steve South who works at the Procurement Technical Assistance Center at the University of Central Florida (PTAC-UCF). His organization exists to mentor small businesses looking to get government contracts. As I’ve noted in earlier posts, the majority of jobs in the U.S. are created by small businesses, and the government has a vested interest in helping those businesses thrive. The PTAC-UCF is actually funded by the Defense Logistics Agency (DLA), which is constantly seeking out new small business providers. His talk focused primarily on the government side of things; I will throw in some of the information I’ve acquired from knowledgable friends and other events (such as the Space Frontier Foundation’s NewSpace Conference) as well.
Investment money, of course, starts with you. If you’re trying to build a better mousetrap (or equivalent), you need to be willing to put up your own money–as much as you can safely part with and still put food on the table. And if you don’t have any of your own money invested, you might be looked upon with suspicion. Investors are people you beg/borrow from to pay for things that you cannot.
Friends and Family: The next people small businesses most commonly seek out for funds are friends and family. There are a few reasons for this:
- They know, trust, and believe in you.
- They might or might not charge a lot of interest.
- They’ll be more forgiving if your venture fails and you’re unable to repay them.
- They aren’t (as) likely to ask for collateral.
There are some downsides to borrowing from friends or family, the primary one being the tension it can create at social gatherings if your business fails, you don’t pay them back, or the friend feels you’re wasting their money. If you put friends or family into a compromised financial position, that also can strain the annual family get-togethers. A good question to ask before your borrow from a friend or family member is, “Can you afford this if the business fails?”
“Angel” Investors: An angel investor is typically an individual with means and a willingness to assist others. Your father’s rich friend, maybe, or someone in your community with a habit of investing in and encouraging small businesses. They will most likely loan or invest up to $100,000, which might or might not be the full amount your company needs to get going.
Venture Capitalists: These tend to be organizations or partnerships with access not only to their own money but others’. They have more money to invest and are in it for the long haul with the express expectation of a return on their investment. This means they’ll do more “due diligence” (background checking) of your people, your financial state, your credit history, and the realism of your invention and business plan.
The key thing to remember about outside investment is that you don’t get something for nothing. People providing you money to support your business will obligate you to some sort of quid pro quo. This could mean that they have a say in how you spend your money, how you make your decisions, or how profits are shared. Money from other people helps you do what you want to do, but that money will come with strings attached, and it’s wise to get a written agreement up front stating what your investor’s terms are before accept the offer. If you can fund your business without outside help, more power to you. That gives you more freedom to do things your way.
Tools for Working with Investors
Mr. South discussed many of the marketing tools discussed in the Creating Your Value Proposition post: white papers, business cards, and an elevator pitch, along with an email signature block as well as a marketing plan and capabilities statement.
A capabilities statement is a one-page description of what you/your company can do. This would include core competencies, past performance, business differentiators (value proposition), company contact information, and branding elements such as your logo.
If you intend to work with the government, you’ll also want to include your special small business categories, if applicable. The government will have additional set-aside contracts for particular types of SBs, such as woman-owned, veteran-owned, Native American Owned, or HUBZone (business located in economically depressed areas). The government also likes you to include your Dun & Brodstreet Number (DUNS #), which is a unique identifier for your business, as well as the type or types of industry your business would fit. This is last item is covered by the North American Industry Classification System (NAICS).
More from PTAC
Organizations like PTAC are set up to mentor small businesses interested in working with the government. In addition to walking SBs through FedBizOpps, the PTAC also provides access to opportunity tracking systems such as Gov$pend, FEDMINE, and Teaming Pro.
Mr. South also suggested that SBs pursue a strategy of “intentional networking,” where you seek out other businesses in the community as potential partners. Another approach is to do a “KLT” exercise, where you reach out to people you Know, Like, and Trust and have a discussion that would result in a potential “ask” (as in, asking for a sale).
More resources and activities to consider as you build your business.