The first step in effectively raising investment capital is to learn how to manage cash. At no time is this more important than in the earliest days of a company.
There are just two ways to increase the cash available to a startup company: spend less or take in more.
Spending Less
When you don’t have a product to sell or customers to sell it to yet, find smart ways to spend less.
1. Create a mindset, discipline and culture that conserve cash. From day one, think before you spend. Effective cash management begins with the founder. As the company grows and more employees come on board, if there isn’t a firm and well-understood practice of managing expenditures, things can quickly unwind.
2. Set up a capital plan with cash flow reports and review them every week. Every entrepreneur must spend time with the books. That’s the only way you will know for sure how your money is being spent. At all times, you should be able to answer this question: How many weeks of operating capital does my company have left?
3. Identify creative ways to reduce operating expenses.
- ■ Office space: Use a home office. Co-locate with another business. Move into a business incubator like SpringBox Labs, The DEC or [email protected], where shared equipment and a spectrum of services, such as utilities, internet and reception, are part of the package. Turnkey space, created especially for entrepreneurs and startups, can save cash and time.
- ■ Lab and manufacturing capabilities: Talk to universities and research institutions to investigate access to laboratories. Private sector companies will often lease equipment off hours. Some accelerators and incubators have wet lab space.
- ■ Service Providers: Negotiate all fees with service providers. Sometimes providers have a special rate for startup companies. At TechColumbus, we have a network of attorneys, CPAs, market development leaders and human resources experts, etc., who have committed more than $2 million in reduced and pro bono services to our clients.
4. Treat variable costs as if you are spending your own money, which you are.
- ■ Internships: Speak to local colleges and universities about internships. We’ve seen college interns conduct market research, design web sites and even perform customer interviews.
- ■ Travel: Try not to. Use teleconferencing whenever possible. If you must travel, do it smartly and cheaply using internet sites such as Kayak.com, Yapta.com, Hotels.com or Priceline.com.
- ■ Delay capital purchases: Use the computers and servers you have. If you must buy office equipment, buy it used.
- ■ Barter: Is there a service you can provide that another company might need? For example, can you offer IT consulting in return for business development help?
Finding Sources of Cash at Concept Stage
At the Concept Stage, it is really difficult, but not entirely impossible to increase cash flow.
1. Invest your personal resources. Don’t expect others to invest in you if you aren’t willing to invest in yourself. Anticipate needing $25,000 to $100,000 to carry an idea through proof of concept. We’ve seen entrepreneurs tap into savings, home equity, retirement accounts and credit cards, but before you take these steps, talk to customers to validate your idea. Make some progress toward proof of concept.
2. Consider investment from friends and family. People who know and trust you may be willing to accept more risk and a lower return. Just be aware that accepting funds from people you know carries some risk and consideration all its own.
3. Compete for public/private sector concept investment funds. These days, recognizing that venture capital is almost entirely later stage, most states, many universities and research institutions, and some corporations participate in early stage funds. For example, in Central Ohio we just announced $1 million and more than $7 million in two new Concept and Catalyst Funds.
4. Establish a line of credit with a local bank. You will need collateral, so this isn’t easy to do at the Concept Stage—but even if the bank’s answer is “no,” start to build a relationship that you can use when you do have collateral assets such as intellectual property or customer receivables.
5. Considering micro-lenders or crowdfunding. There are micro-lenders who make loans from about $5,000 to $50,000. Investigate crowdfunding, but before jumping in, be sure to seek expert advice from an attorney or other source who understands the implication for future investors.
Every Concept and Seed Stage startup needs enough cash to survive until the business reaches cash flow positive. Cash pays the bills. Cash meets payroll. Cash funds the critical milestones that reduce risk and lead to investment capital.
If an entrepreneur doesn’t figure this out fast, the business doesn’t stand a chance of getting off the ground.
