“When you are starting a business, every penny counts. Now more than ever, with interest rates rising and the venture capital market tightening up, raising money could be challenging. This does not mean it won’t happen, it just means that startup capital could be harder to get, and that money may come with some strings attached. With that in mind, it’s important to strongly consider what you need to get your business off the ground.
The first decision to make when starting a business is whether you are building a startup or a revenue-generating business. Startups reach for the stars, aim to scale more quickly than their profits allow and require significant amounts of investment to sustain growth before monetization of the business kicks in. Since these ambitious companies take serious risks, investors are looking for monumental growth projections of their successful companies to balance out all of their failed investments. Investors in these situations, who often fall into the category of Angel Investors or Venture Capitalists, require a large percentage of the company in return for their money, or an extremely high interest rate on their cash. They also have high expectations and will put pressure on a founder to focus on generating cash and profits and potentially selling the company for a gain above all else.
Revenue generating businesses, on the other hand, are designed to make money from the beginning, which gives them the opportunity of reinvesting profits to continuously fuel growth. A smaller amount of capital is generally needed in a revenue-generating business, and a founder can often go to the bank, show business projections or purchase orders, and get funded. There are also other lenders, such as Kabbage who make loans as an alternative to a traditional bank situation. By taking and paying off a loan (or self-investing) you retain full ownership and control over your company, and more likely a long-lasting business that you retain control of, should you want that.
Another question to ask yourself when starting up is whether you want a lifestyle business or a growth company. Lifestyle businesses are ones in which you make enough to support yourself and live a lifestyle you desire, but aren’t solely focused on maximizing profits. It may be hard to find investors for lifestyle businesses since the incentives of investors are usually to maximize profits and therefore are not aligned with those of the business owner. So before you try to fund your business, ask yourself what you want to build and why you want to build it; that will determine how you fund it.
The next thing to consider is how much money you need to get your business off the ground. The Above the Glass Business Plan tool is a really thorough instruction of what to consider when you plan it all out, and helps you hone in on the revenues and expenses. Carefully think through all expenses related to business, both cost of goods sold and operational expenses, project total revenues you will make, subtract expenses from revenues on a monthly basis, and use the difference between the two to track cash flow over time. Most businesses lose money before they turn a profit, so based on your cash flow, what is your absolute lowest cash balance? Whatever that number is represents the total amount of cash you need to sustain your business before it can sustain itself. That number is what you need in startup capital.
One small piece of advice we give is that before you quit your job and invest all of your money into a business, go test your product out on the market. Are people interested in buying your product? How much will they pay for it? By starting your business as a side-hustle and allowing it to gain traction, you can better make decisions for long-term success instead of short-term cash-flow needs. Financing a business can be the hardest part of getting it off the ground. If there is any way you can mitigate risk, position yourself for profitability, operate without investors for as long as possible the better position you will be in when things finally do get off the ground.”