The Path to New Business Funding: 3 Contrasting Routes
Prelude to Starting in Business on My Own
Back in 2015, several life-altering circumstances came into alignment and led me on a journey of exploration, filled with the resolve to create a real startup business. I looked forward to moving on from being merely ‘self-employed’ for the first time in my life. New business funding is something I didn’t consider until later.
Since that pivotal decision, I have made inroads into plenty of different business models, and have sold both products and services to a variety of customers.
I’ve had a few different partnerships and experienced a couple of distinctly different approaches to raising funds in the critical early phases of getting businesses from the tarmac to getting enough wind under the wings to take flight.
Learning from What Ails You
As a natural freelancer, I landed creative gigs mostly from the early 2000s up until my daughter was born in 2009. Her birth was sobering.
At that moment, with the strong undertow of parental duty and money pressure pulling at every fiber of me, I decided to take a corporate job for the first time in my life. My entry point was fashion (I was surprised at myself) as part of the global expansion team for one of the largest family owned fast fashion brands in the world.
I learned a lot from being a part of a big, fast-moving company obsessed with growth. But as all this was informative, I realized that having been independent for so long, the confines of corporate bureaucracy stifled me.
I saw horizons I couldn’t chase and encountered limits that stood in the way of my success. In retrospect I’m extremely grateful for all the experiences I’ve had in my career, varied as it has been. It is what made it possible for me to chart my course as I have done, for better or for worse.
Are there many more ways to access business funding? Sure. There are others, but today I want to focus on just a few of them…
New Business Funding method number one: the bootstrap approach
After leaving my job in 2015, the first goal I had was to be with my family more. My daughter was only 5 years old at the time and I worried that I missed too many precious moments in those early years. In an effort to make up for that, I decided on being at home and building a small family business that my wife and I could enjoy together.
With the bank topped off with several years of savings, I was convinced I had enough personal resources to let me bootstrap a little business experiment. In my mind, the whole thing was low stakes. It was decided, the first internet business would be a learning experience. Learning trumped business goals, and unsurprisingly, it didn’t succeed (there’s a lesson there).
The important lesson was that the conditions for that business to succeed weren’t right and I couldn’t overcome the obstacle easily. I spent maybe $400 on the project and earned back 75% of it. Fine. I went to business school for $100 on that one. Take it as a learning experience. It was an e-commerce play in natural products for health and I learned something…
What businesses work best with this type of approach?
- E-commerce businesses are a great fit for bootstrapping, especially if your products are a low-cost investment (think low MOQ and drop-shipping). Small cottage industries and small home businesses are great, cheap businesses to start. If you make your own product, it could be even better.
- Non-e-com, low-cost physical product businesses. While it seems like everything has to exist online right now, and in a way it should, if you have a non-digital path to connect to your local community, you can sell a physical product or products that you make or source on your own. This is a great starter business model, giving you easy access to the whole experience of running a business, and taking advantage of an available local economy.
- Service businesses. One fantastic thing about offering and selling services is there’s no inventory to purchase, nothing other than the cost of educating yourself and building your offer, possibly a few essential management tools, tools for analysis, and so on. By providing a service or coaching or anything to educate an audience of people willing to pay for what you have to offer, you can start with very little upfront investment.
Method number two: business loans, credit cards and more
The problem with business loans and various lines of credit, startup business loans, equity financing and the like is that you actually have to generate revenue and pay this borrowed money back!
There’s a reason why banks and venture capital money often want to see a business plan before considering you for business financing options or as a viable investment: they want to ensure that you have a viable plan for how to turn their capital into a return. Startup loans are great, but not so much if it only results in your business failing and the investor losing their play.
If you are a truly fledgling business without a clear focus on scalable growth, perhaps it’s wise to stick with a bootstrap approach in the early phases of your business. In fact you will probably need to do this anyway in order to create your MVP, your proof of concept, and even to show a whiff of traction before you’ll be eligible for business startup loans anyway.
For business loans, a solid business plan and a decent credit score might be all you need to get some money to cover operating costs.
As a new business owner, if you have the option, choose the least risky funding option available in the beginning. In my experience it will only cause your core business to strengthen so when the opportunity arises to talk to real venture capitalists, you will be ready to grow.
New Business Funding method number three: friends and family
Part of my story, and if you’ve ever read any of the blog posts I may have mentioned in the past, is that I live in a foreign country.
I’m from the United States but I live in Japan. I had just jumped off of my secure job in fashion and into a world of fending for myself in a foreign land, and I didn’t have the same advantages navigating Japan’s marketplace that I would’ve had in the US.
When I encountered setbacks in my big plans of making a remote business work, I did what lots of people do, which is to reach out to friends and family for support.
I’m not just talking financial support, I also needed emotional support, and I discovered I had an untapped resource; friends and family are a perfect starter audience for early-stage business endeavors, helping you to build your courage up to be who you are becoming.
Friends and family are like a pool of people to offer discounts, to try out different marketing methods, and to study what motivates people. We have family and we have friends for a reason. Don’t use them, but include them in your journey and maybe you will inspire someone to either join you or to support you in unexpected ways.
What businesses work best with this type of approach?
- Everybody. Every type of business can can use the support of friends and family to a larger or smaller extent. They love you and care about you. Include them whenever possible, even if they don’t understand what you’re doing. Just be strong in the face of your aunt, negative Nancy.
New Business Funding method number 4: the startup investment path
After about 6 months of operating the health product e-com brand, ApuforLife, then as an SEM and marketing service for solar installers called Solarboom Agency, I finally coalesced my efforts on the business that I thought had the most potential to affect positive change, Support4Good, and combined my knowledge, products, and services into one platform but in doing so, I reached a difficult place.
Providing services and customer support in the United States while living in Japan for several years was not easy, and I had worked my tail off trying to make it work. It hadn’t been unsuccessful; I had annual clients and contracts worth less than $100,000. I found myself alone in the home office too much though, physically and psychologically I felt disconnected from the people I served. I needed a change.
I was stuck because I didn’t know how to come up with the money I needed to grow my business, and build the core of Support4Good, a web app to help nonprofits and businesses support each other.
That’s when I met my business partner, who needed my skills to launch, and together we started a different business, Dream Drive , a camper van conversion and rental company based in Tokyo. My new partner had a wealth of knowledge and skills that complemented my own, plus he had connections in finance, business executives, and the Tokyo startup world. In this new business, and for the first time, I was able to learn about how to raise money from friends in high places more effectively.
Support4good is more of a philanthropic oriented business, and my mentality is more akin to non profit organizations. At my core, I am not somebody who naturally thinks like a tech startup founder would; about bringing 10X or 100X returns to potential investment partners. I am focused on doing the right thing and have to continually challenge myself to assess my primary benefits in bottom line terms as well as the triple bottom line.
Fortunately in the context of Dream Drive, I am able to approach fundraising as a start up and think about business funding in the context of large overhead and operational costs, payroll, and real marketing goals for the first time.
The idea of a startup business approaching advisors, angel investors, VCs and CVCs, and it’s similar to grant writing for nonprofits in a sense, is the now-classic Shark Tank scenario: you have a business idea, a minimum viable product, and a pitch and with that you want to drum up business credit, angel investors and eventually, venture capital.
With that MVP and that pitch, you go out to investors to sell your idea. Friends and family can and should be a part of this but it is necessary to constantly widen the net to reach investors at different levels who may be interested in getting a piece of a promising company or idea that they hope to earn a future return on their investment.
What businesses work best with this type of approach?
- Capital intensive businesses that need funds to achieve sustainability. In our case, we are converting vans into camper vans and renting them out for people seeking to explore Japan more deeply. In the beginning, we first needed to acquire vans and building materials as well as hire a few team members to do the work.
- Tech and Sass businesses. These types of businesses often don’t see returns or profits for years. Even so, investors are willing to put their money into these types of companies because they can be exponentially scalable and even though there are more losses than wins, when there is a win, the payoffs can be huge.
- Any business that is nationally or globally scalable.
- Note: investors love 10x and 100x returns but of course nobody can guarantee any of this. The path forward is to be able to model this future success convincingly, a task that sounds easier to do than it is. You will need important market data and analysis, financial modeling, and some degree of traction in the form of customer volume before you will ever perk up the years of the big investors. Even angel investors need a solid plan before showing much interest.
There you have it: three clear paths to funding a new business.
The stronger and more resilient your business model is, the more likely you’ll be able to get a hold of larger investment. And it is important to remember that lifestyle businesses don’t always need that larger investment.
The most important thing to figure out is what you want to achieve 1 year,5 years, and 10 years down the line with your business and adjust your fundraising plan to support this objective.
Every business, old or new will need additional funding at different stages of growth. It’s better to realize that in the beginning.
Starting Up and Doing Good
If you have a company, no matter how large or small and you also have intentions of spinning off positive social or ecological impacts, there are resources available just for social innovation companies that you might want to check out.
The biggest difference with these funds is that they have already balanced their expectations of financial reward with the positive social and environmental impact your business can make and so the measurement of success may not be as laser-focused on returns… something to consider.