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Contrary to popular belief, business plans do not generate business funding. True, there are a variety of financing options that require a business plan, but no one invests in a business plan.
Investors need a business plan as a document that communicates ideas and information, but they invest in a company, a product, and people.
Small Business Financing Myths:
Venture capital is a growing avenue for funding businesses. Indeed, venture capital financing is very rare. I’ll explain more later, but let’s just say that only a few high-growth plans with high-powered management teams are enterprise opportunities.
Bank loans are the most likely option for financing a new business. Actually, banks do not finance business start-ups. I’ll go into more detail on this later. Banks should not invest depositors’ money in new businesses.
Sell business plans to investors. In fact, they don’t just have to have a well-written and solid business plan (and pitch) that can sell your business idea to investors, but you’ll also convince those investors that you’re worth investing in. When it comes to investing, it’s as much about the viability of your business idea as it is about whether you’re the right person to run your business.
I am not saying that you should not have a business plan. You should Your business plan is an essential piece of the funding puzzle, laying out exactly how much money you need, where it will go, and how long it will take you to earn it back. Everyone you talk to expects to see your business plan.
But, depending on the type of business you have and the opportunities in your market, you should tailor your funding search and your approach. Don’t waste your time looking for the wrong type of financing.
where to find money
The process of seeking money must match the needs of the company. Where you look for money, and how you look for money, depends on your company and the type of money you need. For example, there is a huge difference between a high-growth Internet-related company looking for second round venture funding and a local retail store looking for second round financing.
In the following sections of this article, I’ll talk more specifically about the different types of investments and loans available to help you finance your business.
1. Venture Capital
The business of venture capital is often misunderstood. Many start-up companies are angry with venture capital firms for failing to invest in new ventures or risky ventures. People talk about venture capitalists as sharks – because of their perceived predatory business practices, or as sheep – because they allegedly think like a herd, all wanting the same types of deals.
This is not the case. The venture capital business is exactly that business. The people we call venture capitalists are business people who are charged with investing other people’s money. It is their professional responsibility to reduce the risk as much as possible. They should not take more risk than is necessary to generate the risk/return ratio that their sources of capital demand of them.
Venture capital should not be thought of as a source of funding for only a few exceptional startup businesses. Venture capital cannot afford to invest in startups unless there is a rare combination of product opportunity, market opportunity and proven management. A venture capital investment must have a reasonable prospect of generating a tenfold increase in business value within three years. It needs to focus on new products and markets that can reasonably be expected to increase sales by several folds in a short period of time. It needs to work with proven managers who have worked with successful start-ups in the past.
If you’re a potential venture capital investment, you probably already know this. You have members of the management team who have already gone through this. You can convince yourself and a room full of intelligent people that your company can grow tenfold in three years.
If you have to ask whether your new company is a potential venture capital opportunity, it probably isn’t. People in far-flung areas of new growth industries, multimedia communications, biotechnology, or high-technology products are generally aware of venture capital and venture capital opportunities.
If you’re looking for names and addresses of venture capitalists, start with the Internet.
The names and addresses of venture capitalists are also available in some annual directories:
The Western Association of Venture Capitalists publishes an annual directory. The organization includes most California venture capitalists based in Menlo Park, CA, which is home to an astonishing percentage of the nation’s venture capital firms.
The Pratt Guide to Venture Capital Sources is an annual directory available online or in print format.
2. Type of venture capital: Angels and others
Venture capital is not the only source of investment for start-up businesses or small businesses. Many companies are funded by small investors in what is called a “private placement”. For example, some areas have groups of potential investors that meet occasionally to listen to proposals. There are also wealthy individuals who sometimes invest in new companies. In the story of business start-ups, groups of investors are often referred to as “doctors and dentists”, and individual investors are often referred to as “angels”. Many entrepreneurs turn to friends and family for investment.
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