Sources of Funding

Recently, a question was posed to me about sources of funding for a start-up, and I figured this would make a good posting for my Blog.

The general sources of funding for a start-up in the order they are often obtained are:
1) Bootstrapping
2) The Three-Fs
3) Angels
4) VCs
5) Public Markets

Bootstrapping - bootstrapping means self-funding. The person starting the business uses savings, takes out a second mortgage, uses their credit cards, etc. to pay business expenses. If you can do it, this is generally the preferable route, as you keep full ownership of the company and don't have to go through any hassles of convincing others to fund your business. This was the form of funding I used when I started helpUhire Solutions.

The Three-Fs - the 3 Fs are friends, family, and fools. This terms comes from that fact that the vast majority of new businesses fail, so only friends or family have a connection with you that makes them willing to risk money on a start-up. The money is often easier to obtain (these people are investing because they believe in you, not because they really know if the business will make it), but there is an added risk that if the business fails you may be taking your parent's retirement funds with it. The bike shop I am working with was started by a friend of mine, and I have put up some money as an investment (hopefully as a friend, not a fool).

Angels - Angel investors are rich people, who for some reason decides to invest some of it in startup(s). The reason they do this can be to make more money, but it can also be for other reasons (the thrill of startups, to see a technology make it, etc.). Being that they are already rich, they are often willing to take bigger risks than others, so are usually the first outside funding a company gets (often well before a VC would consider investing). They generally invest between 10's and 100's of thousands of dollars into a company. I have never been involved with getting money from Angels, so don't know the process of finding and courting them.

Venture Capitalists - VCs are people who invest money into companies for the sole reason of making more money (hopefully lots of it). They will invest money in exchange for an equity stake in the company. They do often want a significant stake in the company (often controlling), and have been known to oust founders if they feel that the founder is not getting them to profitability fast enough. They target companies that they think can grow and prosper to the point that in a few years it will be either acquired or can go IPO - which are when the VC is able to cash in any profits. VCs are looking to minimize risks, so won't invest in a company unless they see significant upside - so usually won't talk to you until you have working products, customers, income, etc. (the exception are for the marquee names - the serial entrepreneurs who have started and successfully run companies before, which most of us are not). There is a pretty significant dog and pony show required to get VCs to invest - which is time spent producing reports and presentations for them, and not spent growing your business. One client I worked with had angel funding and was considering VC funding, but felt they wanted too much control for the money they would put in, so decided not to go for it.

Public Markets - public markets are where you have a listed stock on a stock market, and anyone can buy shares in your company. This is not a stage of funding for a start-up, but instead is for a mature company.

There are other sources of money, such as bank loans and supplier terms, but these generally are limited in that the lenders won't want to put their money at risk without some sort of protection (such as collateral, proof that the company can pay for the items, personal guarantees, or similar). The bike shop I am working with is using supplier terms for a portion of their inventory, but the owner had to personally guarantee he would pay off the loan even if the company went bankrupt.

There are some government grants and SBA loans available, but I don't know anyone who has used them. It seems the paperwork and hoops you have to jump through, along with significant limitations, make these funding sources less useful than one would hope.

A good book that covers a lot of this is Art of the Start, by Guy Kawasaki. Guy is a VC in Silicon Valley, and has been involved with many start-ups. Definitely a useful book for those looking for funding, particularly if you think you may want to go the VC route.

Marketing is not equal to Advertising or Sales

I am a member of the Silicon Valley Product Management Association, and while attending a meeting last week, I heard a common issue - that people (generally Engineers) think that marketing and advertising are synonymous. Though this is a step up from those in the general public that think marketing is the same as sales, it is still incorrect.

Marketing vs. Sales

Marketing involves dealing with matching products that a company makes with what customers want to buy. But so does sales. The difference is in scope and timing.

Marketing's focus is supposed to be larger scope - what I call a "one to many" communication. What products would many people want to buy, and how do we communicate about these products to all these people. In sales the scope is much smaller, a "one to one" communication. They are concerned with what products does this particular customer want to buy, and how do I communicate the benefits from our product to him in a way that convinces him it is the right product? Actually, marketing should have been the one that connected that sales person to the prospect (through getting leads), and given the salesperson the tools they need (information about what to say, sales literature to leave behind, competitive information, etc.) to allow the sales person to do their job.

Timing is also different. Marketing is concerned about a much longer term (how to make a product most profitable over its life), where sales is concerned about closing individual sales this quarter.

Marketing vs. Advertising

Ok, without a doubt, advertising is a part of marketing. But it is just one tool that marketers may use (and many marketers don't use this tool, and are still quite successful). So what is marketing then?

Most marketing text books talk about the 4-Ps - Product, Price, Place, and Promotion - as the main functions of marketing. They are:

Product - basically, do you have products that meet the specific needs of the customer? Marketing should be involved in product development and acts as the voice of the customer. Marketing obtains data on what the customers want (market research) and bringing this information back to the people who make the product (engineers, designers, developers, etc.).

Price - this is whether you are selling for the right price. Customers generally want as inexpensive as possible, where companies want to make as much profit as possible, so the challenge is to balance this.

Place - basically this is whether you have the products for sale where the customer wants to buy it. Choosing whether to sell through stores (and where the stores should go), online, direct, distributors, etc., or some combination of these, is all part of this.

Promotion - basically this is whether you are getting the correct message about your product and what it can do to people who may want to buy. Advertising is one method of doing this (but not the only one) and a lot of thought needs to be put into what you say (the message) for all this promotion.

So, as you can see, advertising is not equal to marketing, as advertising is just a very small part of what someone in marketing does.