The Complete Guide to Outside Investment for Startups:
Starting a business is inherently a catch-22. The majority of internet marketers start a business in order to growth their personal wealth, but they typically don’t have the finances to bootstrap their business in the very beginning of its growth. Not every business needs outside investment – many freelancers and small internet entrepreneurs will never talk to a single investor during their entire product cycle – but more ambitious startups and application developers normally go through one or more investment phases where they seek outside financing for their ventures.
Before you look for investors
When you go to investors, you are giving up control of a portion of your business in exchange for startup capital and operating expenses. Even loans, which do not come with explicit equity sharing, also involve giving up some financial control to the accounting departments of the banks that make the financial decision. Every investor in a business becomes a stakeholder with a vested interest in your success, so be prepared to cede a little bit of your own control as you strive to make investors happy and to show improvement in the metrics that they measure.
Small Business Loans
Despite the thousands of websites claiming how easy it is to receive an economic stimulus grant or a small business loan, banks are normally very hesitant when it comes to financing new businesses. Banks have to protect their monetary investments, and loans to businesses are extremely risk… especially when the business is based on the internet and has few assets that could conceivably be seized and auctioned off. If you are able to find a bank that will loan you money for your business, be prepared for a relatively high interest rate and for a collateral requirement. You might have to put some of your personal property, like your house, on the line as collateral.
The Presale and Crowd funding
Kickstarter has revolutionized the way that product-based startups are able to operate, removing some of the risk that the startups would produce a product without being able to generate enough revenue to turn a profit. Kickstarter allows any internet marketer to develop a product (a real estate investment guide, for example) and then gauge interest through a crowd funding campaign. If enough people sign up for the product to justify the cost of fully producing it, the internet marketer can go through with the product manufacture with the pre-funding in place.
Kickstarter is not a magic solution; it still requires a great deal of effort. An entire industry has popped up around consulting for Kickstarter projects, and there are a variety of marketing tools that you can use to increase your product’s visibility and the engagement of your potential customers. We will explore Kickstarter more thoroughly in another article, but for now – if your product is a visually appealing and physical product, or a multimedia product with mass appeal, Kickstarter might be a viable option for risk-free product launch.
If your internet marketing dream requires multiple employees or a lengthy product development cycle, or if you believe that it might be some time before you turn a profit or show revenue, consider looking for outside investment. Investors pick projects that they believe will be successful, providing cash for operating expenses and capital purchases in exchange for a percentage of equity in the company. Basically, in exchange for operating capital, you are giving up a portion of your company to the investors who will then have a say in your business operations (and can theoretically overrule you depending on the percentage of the company that they control)
Outside investment might seem like the antithesis of the internet marketer lifestyle, but it can be necessary to get ideas off the ground into a stage that they can be executed. Look at a project like Twitter. If Twitter never had investors, there is no way that it would have been able to grow every year, especially because of its lack of revenue. Would you rather be the sole owner of a $20,000 a year business, or a 40% owner of a multi-million dollar enterprise? Letting investors into your company can also expose you to other business and management ideas and it will give you access to mentors that can help you negotiate the world of business.
The Next Step
In the next article, we will explore the steps that you must take to prepare your company for seeking an investment. We will go over registering a new business and creating a business plan with accurately forecasted financials and rock-solid market research that banks and investors will salivate for.
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