Think back to a time when you were asked to pick players for a team. If you were strategic, you would pick your players based on different strengths and use diversity of skill to set your team apart. You should think about funding the same way you think about recruiting a great team.
Different types of funding have certain strengths + weaknesses and will fit the company in different ways.
Growth capital is critical to your small business, but not every dollar you bring in has the same cost or benefit, just the same as a team of different players. For funding, you need the best blend of equity, debt, or alternative funding to fit the intent of your business.
Large companies have the luxury of “optimizing their capital stack” — they create the balance of debt and equity that maximizes their entity value.
Most small businesses don’t have that luxury. If you are growing, you will likely take whatever money you can get. Don’t just take whichever player ecstatically waving their hand to be picked — we can help you figure out the right “capital stack” based on what is needed, accessible, and fits.
“We did not have to give up nearly as much equity as we thought.”
– Capital Strategy Client
Here’s our process…
Clearly articulate your game plan for business outcomes
If you don’t have an understanding of what you want your company to be, you can’t prepare for it. “Build fast and sell” has a very different funding approach than “I want to build and own a 50-year company I can pass on to my kids.”
A fast-growing SaaS company with no assets to borrow against will typically not have many debt options unless they are tied to revenue. This would lead a company to give some ownership rights — such as part of the company or possibly part of future cash flows — to an investor in exchange for cash.
A product company may be able to finance equipment or inventory with debt structures because those are assets, but they won’t have the financials for new hires.
Some founders want to maintain complete control and are willing to take on some financial risk to do that; some founders want to optimize for fast growth regardless of the control investors may require.
Your vision for the company should drive the structure of the funding.
Deep dive into what the cash gaps are (and when)
The most expensive cash you can get is when you raise a large amount during the startup phase. When you need the cash matters as much as the amount you need.
Whether it’s for a software, services, or product company, cash needs to come in “step-jumps.” Hiring, buying equipment, and marketing costs are not linear on the calendar. A business may need a lot of cash upfront, or most of the expense can come along the way.
You can start a software company for a fraction of the cost you could 10 years ago, but fast growth requires hiring talent and marketing. A product company may require large expenditures early, but the remaining growth widely correlates with capacity limits to inventory and production costs along the way.
Understanding when these cash needs occur is critical to know what kind of funding you need.
Align each capital need with types of capital options
Equity is the most expensive form of funding. Revenues are the least expensive.
Why give up part of your company (equity) when you could pre-sell services and products and give up zero ownership? Why create a loan payment every month when your cash flows are minimal if you could get patient capital that improves your cash flow and reduces your risk?
Don’t match long-term funding with short-term needs and vice-versa. Hiring talent and developing a product well ahead of revenues from that product requires a different type of funding than buying inventory to deliver on a purchase order.
You are hiring funding to do specific jobs. Make sure they match up.
Settle on a specific strategy and get to work
Mapping out the overall purpose, needs, timing, and amounts will allow a company to optimize for success, the same way a large company does.
The plan will need to take into account what type of funding is accessible, what each deal structure looks like, where to target, how to pitch or apply, and how long each process might be.
Raising funds takes time and a lot of effort, but it is easier with a map and a guide. We have been there as founders, and we have helped other companies through this process.
“This is the best money we could have spent. Our greatest ROI yet.”
– Capital Strategy Client
If you’re staring at a lineup, but unsure who to put on your team, ask us about our workshop specifically designed to help you get clarity on what you need to do to win.
Provide ongoing support during the process
We are focused on helping small businesses take a successful “step-jump” in growth, so we not only can help create the strategy, but we can also walk with you as you execute.
In the end, we want to see you find the right funding that powers your vision.
Here’s to building something that matters … and growth!
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