ASSETS = LIABILITIES + EQUITY
For business owners, this accounting equation is important and one I revisit repeatedly. To grow a successful, sustainable business, assets should rise over time. Higher profit (defined as income minus expenses) is one obvious way to increase assets. But what about the other side of the accounting equation? Two weeks ago, we discussed debt – using loans to fund business goals. This time, we’re focusing on equity.
Types of Equity Funding
Private equity applies to existing or mature companies, whereby an outside private equity firm takes majority control of your company. Venture capital is different. It typically applies to start-up, or emerging, companies. You issue a minority interest in your business in exchange for substantial funding.
Not every emerging company needs to pursue venture capital. Many companies find success through angel investors and crowdfunding first.
If you’re a social media guru, crowdfunding may be a logical choice. I’d suggest reading Ariel Hyatt’s book “Crowdstart: The Ultimate Guide to a Powerful & Profitable Crowdfunding Campaign.” Hyatt uses her crowdfunding journey to debunk common myths and articulates action steps for your next campaign. Crowdfunding campaign fees vary, as noted in this Kiplinger article, and income tax ramifications cannot be ignored.
Angel investors are wealthy individuals who provide business funding, usually in exchange for equity or convertible debt. Sometimes, angel investors pool their resources and expertise together through an angel network.
Venture capitalists usually offer the most money to emerging companies because they are professionally managing a fund of investments, while angels invest their own funds through a trust, LLC, or other investment vehicle.
Deep into the Abyss of Venture Capital
According to Julia Pimsleur, author of Million Dollar Women and founder of Little Pim, successful venture capital (“VC”) funding requires a combination of three items: mindset, skill set, and network. Women are especially prone to mindset issues. We walk around with mental handcuffs, full of self-limiting beliefs. Once we’re able to overcome those mindset issues, the next challenge is accessing VC. Julia Pimsleur’s goal is to help 1 million female entrepreneurs get to $1 million in revenue or more, and she believes VC funding is one crucial way to get there. At the $1M revenue mark, new possibilities emerge: you drive the next step to remain CEO, rotate to a new role, sell the business, or scale it. Furthermore, you start viewing your business as a money-making machine, building a team and processes to support future growth. Finally, other angel investors and VC firms are more willing to fund your business.
Maximize VC Funding
If you are successful in raising venture capital, how can you make that money go farther? Here are some suggestions.
Self-fund in the beginning. Once you’ve raised a round of funding, have a plan to make it last 18 months or more.
2. Tie your financial plan to the business plan.
Many new entrepreneurs create a business plan that outlines the product or service, target market, and distribution options. Yet they don’t always investigate how much it will cost to turn this business vision into reality. Define a clear plan for HOW funding will accomplish business objectives.
Akin to a personal financial plan, you cannot make significant progress toward ALL goals simultaneously. You must choose one or two areas of focus. Put your financial resources and energy toward those specific goals.
4. Remain frugal.
Even with VC funding, you have a finite amount of resources. Make them count. Don’t be the $5M lottery winner who spends all his winnings within the first year. Grade A office space in New York City is far more expensive than a short-term lease in a suburb. Go for the short-term lease or co-working space. Consider using second-hand furniture for the first few years of business, too.
5. Invest in talent.
Surrounding yourself with a team of highly-motivated, competent individuals is critical to your success. Ask your team to focus on higher-level tasks, and consider outsourcing the rest. You can have the best product or service in the world. Without the right person (or people) to market it, it’s a lost cause.
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Until next month,
Deb Meyer, CPA, CFP®