How to Raise Money for Your Business

Hey everybody, Matthew Paulson here. I want to talk a little bit today about how to raise money for your business. So as the kind of chairman of Falls Angel Fund, I get a lot of requests for coffee inquiries, emails, phone calls from people that are entrepreneurs and that are just looking to raise money to get their business off the ground. Past few weeks I've gotten calls from all sorts of startups. I had a meeting yesterday with an educational software startup, got an email from a medical devices startup, somebody wanting to open a local restaurant, an E commerce company, all sorts of things. And the requirements for capital, how much money a business needs, what type of fundraising that is available to them, really varies a lot from company to company based on what kind of traction they have, how much revenue do they have, how much, how long have they been in business, what is the owner's credit, what's the business model? And there's really not just a one shot answer that I can just give to everybody saying, hey, go talk to this bank, they'll give you a loan or go apply to our angel fund, we'll give you money. Because not every type of capital is right for every business. And there's really some nuances that I think are important that we all understand. And I think there are some unique issues for companies that are in kind of the Midwest and Great Plains, South Dakota, Minnesota, Nebraska, Iowa, North Dakota companies in these states. We're just not loaded with angel investors and venture capital firms like there is out West. It's not as big of a thing here, which makes the challenge a little bit more difficult, but not impossible. So you do have to be a little bit more creative. But I think there are still plenty of capital opportunities if you want to build a company and raise money in this part of the country. If you're thinking about raising money, really the first question you have to ask yourself for your business is how much money do you really need to get your business off the ground? In many cases you can get your business off the ground for a lot less money than you think. Actually, pretty much all of my businesses I started for less than ten grand. So now one of them is a multiple seven figure per year in business in annual revenue. So don't think you need $100,000 or a million dollars right away to start a business, because that's just not always the case. But if you are thinking about raising money, if you have a business that requires capital, you need to buy inventory or equipment or something like that, then maybe you will need some money. So kind of think before you ever even think about what kind of route to go down? Kind of come up with a budget for your first year saying, okay, if I don't have any money coming in, what am I going to need just to operate this business and pay my expenses? What do I need for inventory, what do I need for equipment, rent, a lease, anything like that? Marketing, advertising, employees, everything that you would need to run your business for one year. I think that's kind of a good estimate for how much money that you need to raise. I think you also need to be kind of realistic about how much money you can raise based on your own personal track record as an entrepreneur. Kind of where you are at the country, what your personal credit is, and kind of where you are at in the life cycle of your business. If you're a seed stage company, you're getting started, you haven't raised money yet, you maybe have 100 grand a year in revenue, something like that, you might be able to raise 250,000 to half a million dollars from kind of the angel and venture capital world. If you haven't raised money yet and you're trying to raise more than $500,000, especially in this part of the country, kind of good luck to you. But that's going to be really tough to do because nobody's going to want to risk a lot of money on a company that hasn't really proven itself yet. So if you're going to shoot for more than $500,000, you better have an ace in your kind of back pocket that's going to allow you to kind of convince investors or many other companies that fail. There are actually two different types of equity, or not equity, but two types of business financing that are available to people. The two general categories are one is debt, and then the other is equity. So debt is basically your business, or you are personally borrowing money from a bank for a loan. You, you'll have an interest rate, you'll be paying that off every month over say, three to five years. That's typically how it works. If you can't pass a credit check, you're not going to get, you're not going to get a loan for your business. It's just not going to happen. Because a credit report, a credit score is basically what is your report card and paying off debt. So if you have missed payments, that means that a bank can't trust you based on your past track record to pay back that. I mean, that's just, that's the reality. You can make all the promises in the world that you promise you're going to pay off that debt. But if there's. If you haven't shown in the past that you can, no bank is going to give you money because they see that you don't have a track record of paying your bills on time. And no matter what the reason, that it's just going to disqualify you from getting debt financing. So equity financing is when an investor takes an ownership position in your company. Typically, if you watch Shark Tank, this is how those deals are done. So you say, I think my company's worth half a million dollars. I'll give you 20% of it for $100,000. That's typically how those deals kind of work. The math maybe gets a little bit more complicated depending on how the deal is structured. There are some fancier kind of hybrids between debt and equity, like convertible debt, but we'll skip those for the purposes of this conversation. You know, as kind of the chairman of the angel fund here in town in Sioux Falls, we get a lot of inquiries. So I wanted to take a little bit of time in this video to talk about what kind of companies that we as fall offs angel fund are looking to invest in. So as our angel fund and the four other angel funds in the state, you know, we are really looking to invest in scalable businesses that have the capability to grow into eight figures in annual revenue. So as an angel investor, I recognize that 7 out of every 10 companies that I invest in are going to fail. So that means the three out of 10 companies that can make it have to make up for the seven companies that didn't make it. So because we need to get some pretty good returns from the companies that do make it, we just can't really invest in stuff that doesn't have the capability to grow really big. So stuff like restaurants and retail stores and just local businesses are not things we can invest in because they just won't ever grow enough to offer the types of returns that angel investors need to raise money. So there are kind of four basic criteria that I list that follows. Angel fund that for companies we want to invest in, I already mentioned, one is we want a scalable business. Two, we're looking for high quality people. So somebody that is going to work hard to make their business succeed. We know that business models change as you learn more. So we as an angel fund are investing in the person as much as we are the business. So the old model of invest in a racehorse, I don't know, I forget what it was. But we care about people as much as we do the business model. We want to invest in good people. Three, there is an economic development component of this. So we really want to invest in companies that are located in South Dakota or maybe a state next to South Dakota or are willing to relocate to South Dakota. We kind of assume that if you are from California or Texas and then you're coming to South Dakota to try to raise money, you've probably already tried to raise money locally and it didn't work out. So that's kind of a red flag for us then. Four, you kind of have some, you have to have some initial traction to kind of pitch our angel fund. We don't want to invest in ideas. No investor really wants to invest in an idea. They want to invest in a business. In order to have a business, you need customers. So if you have an idea, try to do anything you can to prove it out and get a couple customers before you try to pitch a fund like ours. Because you're probably not going to get the time of day unless you can show any amount of revenue. So kind of the next step up from angel investors. So people like me and Falls Angel Fund are kind of the venture capital firms around here. There's several of them. There's my friends over at Bird, Doc Equity Partners, there's Bluestem, there is McGowan Capital, Prairiegold. There's probably a few others that I'm just not familiar with. But if you are looking to raise up to a million bucks, you could probably pull that off in kind of the angel investor, high net worth, individual kind of category of money. You're not going to get all the money from one place. So typically you'll kind of have an investment round and you might get a $100,000 from 10 people to get your million dollars. But really kind of after that million dollar point, you know you're going to have to start talking to these VC firms. You know, there's more in Omaha and Minneapolis that you could have too, in addition to those. But it's if you want bigger money, I mean, that's where the bigger money is. So that's just where you have to go. Let's shift gears a little bit and talk about debt financing. So often you kind of think that the first place that people that aren't familiar with financing for a business will go to a bank and ask for a business loan. But banks typically don't offer loans to new businesses that don't have a track record because they just can't quantify the amount of risk they are taking. They don't know what the likelihood of your business succeeding is or not. So they just can't make a loan based off your idea. It just typically doesn't work that way. They might offer you a loan based on your personal credit worthiness and your personal income, say from your day job. So if you have like decent credit and a source of income other than your new business, you know, you might be able to get kind of a personal line of credit from a bank. But obviously your name is going to be on the hook for that. And really they are just giving you an unsecured personal loan that you happen to be using for your business. Again, if you have a bad credit report, your score is like under 700, maybe 650. You know, you're just going to have a really hard time getting a loan from a bank. So if you're in that situation, look for somebody to give you money that's just a person that won't check your credit report or clean up your credit report so that you are kind of financeable. A bank won't just like give you a dirty look for talking to them because it's just you're not going to get very far if you have bad credit and you walk in and ask for a bunch of money. Just it doesn't work. So now I want to kind of talk about some very specific ways other than just kind of the traditional angel and VC route that you can raise money first is kind of an SBA loan. So the Small Business Administration offers several loan programs where they'll guarantee a bank loan to a small business. So it kind of takes the risk away from the bank to offer you a loan because the SBA guarantees it. They have a few different programs. I can't say I'm terribly familiar with all of them, but if you go just the SBA website, they've got a lot of information about their loan programs. If you can get into that, it sounds like it's a pretty good deal and pretty good option. It's definitely worth checking into. Another option is peer to peer lending companies. So again, you have to have decent credit. It's basically a personal loan. Based on your credit score, you can get a 12, 36 or 60 month loan. The two companies that do this are Lending Club and Prosper. So the interest rates are going to be like 6, 7% if you have awesome credit and it could be up to 30% if your credit sucks. So I mean, I wouldn't advise that anybody takes out kind of a 30% loan to fund their business. But if you can borrow, if you have great credit, you can borrow money at 6 or 7%. That might be a pretty good option. Crowdfunding is a pretty popular way for people to raise money now because you get money and you don't really have to deliver a whole lot to the people that gave you that money. Excuse me, other than if you promise any kind of reward, you have to give that to them. But with Kickstarter and Indiegogo you don't have to give anybody any equity. So that's kind of a great deal if you can pull it off. But I think a lot of these types of deals get done poorly and then they just don't end up working out. I really think you have to have an existing audience of people that you can promote your campaign to and you really have to have a compelling story. That's not just give me money for my business. That doesn't work. Really. The message of your crowdfunding campaign has to be about the people and kind of the idea and not about you. Because nobody's going to make a donation just so that you can get your for profit business off the ground. That just doesn't happen. So it's got to be something not about you for to work. And there are whole websites and books and experts that will teach you how to do crowdfunding, right? Maybe that's an option, maybe it's not. I think it's kind of oversold as an idea right now, but some people have made it work. Part time job. You can always deliver pizzas or do something like that. Where I live in Sioux Falls, it is really easy to get a job right now. Everybody has help wanted signs up. The unemployment rate is like 3%. So hey, maybe you just need to work at night for six months delivering pizzas or doing something like that to get say 25 grand to get your business off the ground. There's always the rich uncle option. So if you have a friend, a family member, somebody your parents know, who knows what, that has some money, really you only have to convince one wealthy person to give you money to get your business off the ground. So if you can find that one right person to give you a loan or bi part of your business, then sometimes you can get. If you find the right person that believes in you, is willing to invest in you, sometimes you can get a much better deal than you would get from say an angel investment fund or a venture capital firm. There are some grants that are available from the federal government. Obviously you have to meet specific research and development goals and have a potential for commercialization. But the SBA has some grants through the Small Business Innovation Research and the Small Business Tech Transfer programs. I think they're pretty nichy, so I don't think that's going to apply to a whole lot of people. But they are out there and might be worth looking into. If you have kind of a research technology component, so that's out there. You can also just use the money in your bank account. So if you have any savings, you know, in a bank account, you can use that to get your business off the ground. Probably wouldn't take money out of a retirement account. That's usually not a good idea. But some people do do that and make it work. If you own anything valuable like a car that you don't need, absolutely extra vehicle, old coin collection, bunch of fancy gadgets, you could sell that stuff to sell those assets to grow money for your business. And then finally, you know, hey, everybody has credit cards. So you could use your credit cards to finance your business. Obviously a very risky option. I generally don't recommend it, but again, some people do do that. So that is an option. So kind of the big categories again are angel investing, venture capital, a loan from a bank, an SBA loan, a peer to peer loan, crowdfunding, part time job, the rich uncle getting a grant, using your personal savings and assets and using your personal credit. So that's kind of the 11 ways that I have thought of that you can raise money for your business. Maybe one of them is right for you. If you're not really sure about like which of these options I should look at or if you just don't know enough to. If you know enough to know that you don't know what to do. There are some non profits and companies that offer kind of consulting or not companies, but they're just non profit organizations that offer either free consulting or fee for service consulting on this kind of stuff. One that I'm involved with through Falls Angel Fund is the South Dakota Enterprise Institute or just the Enterprise Institute. They have kind of fee for service coaching for companies looking to raise money. It's pretty affordable. I think it's just sdei.org that's worth checking out. You can also hit up the service corps of retired employees or score. They can hook you up with a mentor that can help you determine your capital needs and what sources you should look at. In the state of South Dakota, there's also the Small Business Development Center. They offer free consulting for small business owners, you can hit those guys up so there. If you just don't. If you know enough to know that you don't know where to get money from now hit up one of those resources and based on the type of business that you have, they can probably point you in the right direction. I think that's pretty much it for this video. Hopefully it is valuable and helpful to some of you guys that are looking to raise some money for your businesses. Keep checking back on my Facebook page and my YouTube channel and hopefully we will have some more of these videos in the near future.