Most new businesses come to being with a great idea. How to get that great idea from concept to marketplace reality is often what separates them.
Entrepreneurs can come into business with substantial investment and savings of their own, enjoy a low overhead-quick return scenario or be completely reliant on financial help.
“When you are in a position where you get to decide if you wish to seek outside funding, that is a luxury not every business has,” says Angela Jackson, managing director of Portland Seed Fund.
Even in the event of successful “bootstrapping” on your own, Jackson suggests that including outside help can still be a benefit.
“It isn’t just money that investors bring to the table, but their expertise and connections that can accelerate you into the market,” she notes.
Is it time for outside funding?
Nate Doran, Northwest region entrepreneur director with Keiretsu Forum, calls this a trick question.
“Businesses need to have a plan,” he says. “A great idea still needs a great market to sell to.
“[Businesses] need to be already speaking with customers, trialing their product,” Doran adds. “This is the time they should be seeking outside help.”
In many cases, businesses are already established, but ready to grow beyond their current reach. Kathleen Sego of Sego’s Herb Farms and board member of the CREDC (Columbia River Economic Development Council) shares that already successful ventures that are scaling beyond their current borders may be perfectly poised for reaching out to angel investors.
Many high-cost seed businesses can first find help from grants and larger corporations who fund research, a common practice in high tech and life sciences.
Best foot forward
Sego states that businesses seeking funding need to have their house in order.
“Entrepreneurs should have a good handle on their financials, properly established their legal entity and genuinely understand their market, regardless of ‘how cool’ their idea may be,” she says.
Sherry Calvert, Northwest region president of Keiretsu Forum recommends utilizing one of the many programs available to young businesses to help them prepare for approaching investors.
“They can help with preparing the financials, creating an accurate valuation and ensuring the business plan and market strategy align the business for success,” she explains.
Selecting the right investment partner
Finding the right investment partner is key. Max Ault, business development manager for the Columbia River Economic Development Council, states, “For the small startup, the right investor means being a mentor: providing guidance, playing the devil’s advocate and acting as a sounding board for growing pains. A strong investor will also make it a point to connect and introduce you to other investors, partners, networks and customers.”
Jackson agrees, “You should get money, yes, but you should get a lot more than that.” Good investors will contribute additional industry contacts that help pave the way for the business.
Calvert urges, “Go where you have friends – someone who will champion your business, product or service.”
In addition to funding, businesses get expertise, marketplace introductions and sound oversight that helps steer the business towards success.
“Most angel investors fund where they have interest and expertise,” Sego states. This is an advantage for the entrepreneur as most investors genuinely want to see the business successful, not just financially, but for the same reasons as the entrepreneur – to see a great idea thrive.
Relationships will vary, but Jackson calls out one constant that she has recognized in successful ventures – solid communication.
“The best CEOs are confident to deliver news, good or bad,” Jackson shares. “Communicate to the investors immediately and openly with your ‘solution hat’ on.”
Investors expect challenges and unexpected things will happen. In fact, Jackson states she gets concerned when they don’t.
“If you are boldly pursuing your market, you need to be aggressive,” she said. “What we don’t want is for news to come too late, which can be company killing.”
Delivering prompt news, whether your aggression panned out or not, will build respect with investors.
Pitfalls to avoid
As with any relationship, challenges can rise.
Calvert and Doran warn entrepreneurs to be wary of valuating their business too high. This is how investors make money, this is their expertise. Setting proper expectations on the value of the business is forefront to getting the partnership off the ground.
“If you fear losing control, you really have to think if this is the right option,” Jackson cautions. You have to be coachable, open to learning from others with expertise in the market.” Entrepreneurs also have to be aware that the time may come when they are asked to step aside in favor of bringing aboard managers with greater experience to steer the business.
The team from Keiretsu also shares their concern over the “Founder Factor.”
“Familial implosion creating an unstable team will generally encourage investors to steer clear of families – siblings, husband-and-wife-owned businesses,” Doran says.
Future of funding
Ault sees Southwest Washington as “home to a budding and vibrant entrepreneurial community, especially in applied digital technology.”
Jackson echoes this, calling seed funding stronger now than in any point in the last five years.