Before Seeking Outside Funding

Posted by: Today's Tip Contributor on June 28, 2011

Before business owners look for external sources of funding, my No. 1 piece of advice is to bootstrap (rely on savings, cash flow, and penny-pinching to fund your business, rather than seek loans or investments). If you can make do without outside funding, then you will have no debt and no investors, which means you will be free to take your company in whatever direction you see fit.

If, however, you really do need to seek external sources of funding, make your company more attractive by either being profitable or having a clear, well-thought-out plan in place that shows your company’s path to profitability. This will enable you to at least negotiate some of the terms of third-party investments. Showing growth helps, too; even early-stage companies that show solid growth will be attractive to investors. The best way to do this is to focus all of your energies on your core function and outsource what you can.

If you are looking for outside funding, I recommend avoiding venture capital funding in your company’s early stages. When there is little you can offer them in terms of value, many VCs will offer to take a controlling stake in your business in exchange for the funds you seek. If you take them up on their offer, you will likely end up with a group of bosses who tell you what to do with your business to ensure a quick return on their investment. Once you’ve built a team and an infrastructure, and you’re profitable, that is the right time to go after VC funding. In the meantime, consider other options. Many times there are alternatives to VC funding, including local angel groups, private investors, and—surprise—friends and family.

Bill Grodnik
Chief Executive Officer
Davinci Virtual
Salt Lake City

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