Many businesses need money to get started and to grow. From loans and lines of credit to venture capitalists and private investors — there are several ways for businesses to get money. But these don’t all work very well for small businesses.
Small businesses aren’t likely to get venture cap funding and they probably won’t get a business loan from the bank because they don’t have a history of successful operation.
So what can they do? There are four options:
- Fund through operations: Start smaller and reinvest profits. This is a good idea but it does slow growth considerably and it can create an obstacle if the business requires a large investment of capital for a piece of equipment. In my opinion, this is the best way if you can do it. It’s good because you retain ownership and control while also staying on top of the growth that’s occurring in your business.
- Fund through borrowing against personal net worth (i.e. second mortgages, credit cards, etc.): It happens. It’s understandable why it happens. There are tons of stories about businesses that have been successful that got started that way. But it’s not advisable and should be avoided. But I’ve done it and you probably have too.
- Fund through business grants: I’m always surprised at the number of grants out there (although I don’t know why it surprises me). I’ll talk more about this in a moment.
- Fund through investors: There are a few different models. There’s the “family and friends” model, which is okay but can be risky to those relationships, and there’s the model where others (not family and friends but other investors, like in an investment club or a crowdfunding scenario).
A quick tutorial on crowdfunding: Crowdfunding is a system where entrepreneurs post their ideas and several investors pledge smallish amounts of money. Once funded, the entrepreneur gets the money and injects it into the business. There are variations: In one model, funds are given and repaid. Kiva does this to help end poverty, and I think that’s a great idea. In the other model, funds are given and repaid with some kind of reward, bonus, or additional return. This is my preference for most new start-ups in North America (where poverty-ending philanthropy isn’t part of the equation). Crowdfunding works for the entrepreneur because they need the money but they won’t get money from commercial funders (lenders and VCs)… and likely they don’t need the hundreds of thousands or millions that the commercial funders tend to lend. A business that needs $5,000 won’t even get an appointment at a VC’s office. Crowdfunding works for investors because they only need to invest a small amount (I’ve seen some investments as low as $10 or $25), but when gathered with other small investments, it can add up. The crowdfunding sites I really like for my clients are ProFounder, PeerBackers, IndieGoGo. A fourth company — CrowdCube — is just starting out (and seems to be UK focused right now) but has the potential to be my favorite.
There’s not much more I can say about funding through operations (do it) or borrowing against your personal net worth (avoid it). But when it comes to grants and investors, here’s something to consider:
IT’S A SALES FUNNEL, BABY!
You probably tend to think about sales funnels in relation to the buyers of your products or services. But you can increase your likelihood of getting grants and investors if you keep the sales funnel mentality front-and-center.
In these situations, instead of thinking of the Customer as someone who buys a product, think of them as the person who says yes to giving you a grant or giving you an investment. They’re still making a transactional commitment and giving you money!
Now work backwards from the Customer stage: Your pitch is like a sales presentation to Prospects. Finding Prospects to pitch to is just like gathering Leads, which you gather from an Audience. The actions you take at each stage are similar, too: For your Leads, you are positioning yourself as an ideal business, but keeping it low-key and non-committal just to get their attention and inform them. However, once your potential grant-givers or investors have identified themselves as being interested in hearing more, they turn into Prospects and you can increase your effort to get them to fund your business.
Just like in your regular sales funnel, this sales funnel requires some marketing activities and sales activities (just not delivered through the same channels). But again, it’s not about showing how your products or services will offer a solution. Rather, it’s about showing them the following:
- For grants: You want to show them the worthiness of your business to receive the grant (how do you match the requirements for the grant? how will you fulfill the mandate of the grant-giving organization?)
- For investors: You want to show them how you will create a successful business that will give them a return on their investment
So create your funding sales funnel in the same way that you would create a regular sales funnel for your business. Outline the stages and triggers and actions you will take. Create a sales presentation that positions you as an expert. Plan ahead to think about the objections that they would have and integrate the answers to those objections into your marketing and sales content. In short, make it easy for someone to give a grant or invest in your business.