Contrary to popular belief, business plans don’t generate business financing. True, there are lots of kinds of financing options that need a business plan, but nobody invests in a business plan.
Investors need a business plan as a document that communicates ideas and information, but they invest in a company, in a product, and in people.
Small business financing myths:
Venture capital is a growing opportunity for funding businesses. Actually, venture capital financing is very rare. I’ll explain more later, but assume that only a very few high-growth programs with time-management teams are venture opportunities.
Bank loans are the most likely option for financing a new company. Actually, banks do not finance business start-ups. Banks are not supposed to invest depositors’ money in new companies.
Business plans sell investors. Actually, they don’t well-written and persuasive business plan (and pitch) can sell investors on your business idea, but you’re also going to have convince those investors that you’re worth investing in. When it comes to investment, it’s as much about whether you’re the right person to conduct your business as it is about the viability of your business idea.
I am not saying you shouldn’t have a business strategy. You should. Your business plan is an essential piece of the funding puzzle, explaining exactly how much cash you need, and where it’s going to go, and how long it will take you to make it back. Everyone you talk to will expect to see your business plan.
But, depending on the type of business you have and what your market chances are, you should tailor your funding search and your strategy. Don’t waste your time searching for the wrong kind of financing.
Where to look for cash
The process of searching for cash must match the requirements of the corporation. Where you look for money, and how you look for money, depends on your company and the kind of money you need. There is an enormous difference, for instance, between a high-growth internet-related company searching for second-round venture capital and a local retail store looking to fund a second location.
In the subsequent sections of this article, I will talk more specifically about different types of investment and financing available, to help you get your business funded.
1. Venture capital
The business of venture capital is often misunderstood. People talk about venture capitalists as sharks-because of the supposedly predatory business practices, or sheep-because they supposedly think as a flock, all needing the very same sorts of deals.
This is not the case. The venture capital business is merely that-a business. The people we call venture capitalists are business people who are charged with investing other people’s money. They have a professional responsibility to reduce risk as far as possible. They shouldn’t take more risk than is absolutely necessary to produce the risk/return ratios that the sources of their capital ask of them.
Venture capital should not be thought of as a source of funding for any but a very few exceptional startup businesses. Venture capital can not afford to invest in startups unless there is a rare combination of product opportunity, market opportunity, and proven management. A venture capital investment should have a reasonable chance of creating a tenfold increase in company value within three decades. It needs to concentrate on newer products and markets that can reasonably project increasing sales by huge multiples within a brief period of time. It needs to work with proven managers who have dealt with successful start-ups previously.
If you are a potential venture capital investment, you probably know it already. You have management team members who’ve been through that already. You may convince yourself and a room full of smart people, your company can grow ten times over in 3 years.
If you have to ask whether your new company is a possible venture capital opportunity, it likely isn’t.
If you are looking for names and addresses of venture capitalists, start with the internet.
This organization includes most of the California venture capitalists based in Menlo Park, CA, which is the headquarters of an remarkable percentage of the country’s venture capital companies.
Pratt’s Guide to Venture Capital Resources is an yearly directory available online or in print format.
Venture capital isn’t the only source of investment for startup companies or small businesses. Many companies are financed by smaller investors in what’s known as”private placement.” By way of instance, in certain regions there are groups of potential investors who meet occasionally to hear proposals. Additionally, there are wealthy individuals who occasionally invest in new businesses. Many entrepreneurs turn to friends and family for investment.