hen I taught entrepreneurship at Cal Lutheran University, I invited Rob Powells, one of the founders of Rocket Fizz, to speak about how he raised funds for his growing startup. He told my class a story that will be familiar to anyone who’s ever launched a business: dozens of banks rejected him for loans.
What he said next, however, surprised me. Fizz’s founders raised the money to start what is now a very successful business by buying a Chinese product and reselling for a profit here in the U.S.
In fact, they didn’t just raise money, they made a killing!
I thought I knew every possible way to raise startup capital, but I’d never heard of anyone starting a venture to fund a venture.
In my introduction to entrepreneurship classes, I’ve always shared with my students the many different ways to finance a new business. I talk about VC’s, angel investors and banks. The reality is those sources are highly selective, and it’s difficult to get money from them.
While Rob’s method worked well for him (Rocket Fizz now has over 60 locations, and more on the way), there are some other important, and often overlooked funding sources I recommend my students try during the stage before a new venture becomes bankable or attractive to angel investors. The truth is, I’d consider these methods before seeking help from family or friends, and before exhausting personal lines of credit.
Here are four funding sources worth considering, along with their various pros and cons.
At EcoStatic, two of our main project planning tools suppliers have been incredibly supportive of our company by allowing us 30-45 days of credit. Our customers prepay 30% of their order for our Slickynotes products and the balance before shipping, giving us a surplus of funds until it’s time to pay our suppliers. This can be incredibly useful when you need a quick source of cash.
However, suppliers alone are not enough. This system will work really well in the first year of operation, but eventually you’ll need to let your customers purchase with credit, and your system will need a different source to maintain positive the cash flow.
Most entrepreneurs know that crowdfunding is an excellent way to get startup capital, especially at the launch stage. It allows you to do several things:
- Confirm there is a need for your product and validate your price
- Create a customer base
- Use the customer’s money to make the product
You may not realize that crowdfunding can also be used at other stages during the startup cycle. At EcoStatic, we focus constantly on reducing costs so our next generation sticky notes become more affordable for everyone. To raise the money we needed to purchase a new printer, we did a crowdfunded campaign two-and-a-half years after we launched our company. We were funded, but getting the campaign off the ground felt like having a second job.
Crowdfunding can be difficult and taxing to do well. You must perform due diligence before you launch, especially when there may be other sources you can tap into.
Microfinancing is useful during your second year of operation. In the early days of EcoStatic, I took us through the process of getting a microloan which we are now very close to paying off.
Microfinancing is mostly based on character: if you have a “fair” credit score and good references, the chances are good you’ll get funded. Be aware that the paperwork is enormous, interest rates are high and the entire process is time-consuming and slow. Two months ago, we applied for a loan with a San-Diego based microlender. Even with three years of documentation, an established credit history and credit scores above 740, we are still waiting to see if we get approved.
If you have good credit, a personal loan will be faster and almost the same interest rate – or in some cases even lower – than a microloan.
4. Sales. At EcoStatic, the most important source of funding will always be sales. When we know we’re going to need funding, I ramp up our sales effort. I make cold calls, send post cards and provide incentives to our customers when they refer Slickynotes to their friends.
Increasing sales isn’t easy, but I find it far less time-consuming and frustrating than the other three sources I’ve covered. Plus, every time you make a sale, you’re increasing your chances of success. If sales are increasing every month, sooner or later you’ll break even.
By Nelson Pizarro (published on September 11, 2016)