While there are ways to begin a venture with limited capital (cash), you’re not likely to get far without the appropriate level of funding. You are now ready to begin looking for funding for one or more of your capital needs:
- Basic working capital to see you through the ebbs and flows of cash flow in a new service business;
- Capital Equipment investments to develop, prototype, and demonstrate a product or process;
- Significant working capital to finance the creation of your business infrastructure and early operations.
Let’s take a look at the possible avenues to finding that money and the costs associated with each.
- Grants for Small Businesses
- Research Grants for Technology Startups
- Financing with Working Capital and Loans
- Equity Capital: Angels and Venture Capital Investors
Bootstrapping, also known as self-funding, is how most new ventures begin. It’s using your own resources and money to start or grow your business. Through cash, credit cards, and sometimes private loans from friends and families, entrepreneurs gather up the cash to get started and try to grow organically through revenues from sales. This is most easily done with a service business that doesn’t require extensive product development investment up front. It also only works if you manage your cash flow religiously, minimize staffing and other major investments, and focus your initially efforts on very limited markets, says Guy Kawasaki.
You may be able to locate some business grants through state and local agencies, nonprofit organizations, or other groups. Business plan competitions are another source of funds (see Business Plan page.) For example, in the Capital Region Financial Incentives listings shown in the Resources section below, you’ll find grants for energy efficiency efforts and certain types of real estate investments, among others. However, business grants are not necessarily free money. They may require you to match funds or to combine the grant with a loan. The amount of the grant money available varies with each business and each grantor.
If your small business is engaged in scientific research and development (R&D), you may qualify for federal grants under the Small Business Innovation Research (SBIR) and the Small Business Technology Transfer (STTR) programs. SBIR and STTR programs encourage small businesses to undertake R&D projects that have a high potential for commercialization.
SBIR. This federal program awards grants and contracts to high-technology small businesses (sometimes referred to as “high-growth, high-impact firms” or “high-tech start-ups”). The awards allow entrepreneurs to carry out the research and development (R&D) necessary to develop innovative technological products that can be brought to market. Eleven federal agencies participate in the SBIR program, with the U.S. Small Business Administration (SBA) acting as the coordinating agency. To take advantage of the program, you must respond with a proposal to one or more solicitations that fit your research goals. The agency then reviews proposals based on technical merit, qualifications, and potential benefits to industry and society. Once agencies grant awards to small business, they can embark on the R&D process.
SBIR is a three-tiered program with the following award stages:
Phase I: < $150,000, < 6 months. Your business and the sponsoring agency explore the feasibility of the project in order to get a better sense of its commercial potential and technical requirements.
Phase II: Available only to Phase I recipients. Up to $1 million for two years. During this period, R&D is expanded and commercial viability can be assessed.
Phase III: During this stage, innovations transition from the lab to the market, and small businesses begin the search for private sector investment. The SBIR program does not fund Phase III; funding comes from private sources or other government grants.
STTR. This program also expands funding opportunities in the federal innovation research and development (R&D) arena. Central to the program is expansion of the public/private sector partnership to include joint venture opportunities for small businesses and nonprofit research institutions. The unique feature of the STTR program is the requirement for the small business to formally collaborate with a research institution in Phase I and Phase II. STTR’s most important role is to bridge the gap between performance of basic science and commercialization of resulting innovations.
All businesses need to investigate obtaining credit through a commercial bank or other investment company. A good business plan and the good credit of the investors will be important in convincing bankers that their investment is sound. The advantages of financing your growth this way is that you do not forfeit any equity in the business and seldom have to worry about management involvement by your financier. However, you are going to pay a pretty significant interest rate on any funds borrowed, and may have to put up collateral.
The U.S. Small Business Administration (SBA) offers several programs to help small business owners and start-ups secure financing. Options include: debt financing, surety bonds, and equity financing.
Guaranteed Loan Programs (Debt Financing). SBA does not make direct loans to small businesses. Rather, SBA sets the guidelines for loans, which are then made by its partners (lenders, community development organizations, and micro-lending institutions). The SBA guarantees that these loans will be repaid, thus eliminating some of the risk to the lending partners. So, when a business applies for an SBA loan, it is actually applying for a commercial loan, structured according to SBA requirements with an SBA guaranty. SBA-guaranteed loans may not be made to a small business if the borrower has access to other financing on reasonable terms. SBA loan guarantee requirements and practices can change as the government alters its fiscal policy and priorities to meet current economic conditions, so you can’t rely on past policy when seeking assistance in today’s market.
Bonding Program (Surety Bonds). SBA’s Surety Bond Guarantee (SBG) Program helps small business contractors who cannot obtain surety bonds through regular commercial channels. A surety bond is a three-party instrument between a surety (someone who agrees to be responsible for the debt or obligation of another), a contractor, and a project owner. The agreement binds the contractor to comply with the terms and conditions of a contract. If the contractor is unable to successfully perform the contract, the surety assumes the contractor’s responsibilities and ensures that the project is completed. Through the SBG Program, the SBA makes an agreement with a surety guaranteeing that SBA will assume a percentage of loss in the event the contractor should breach the terms of the contract. The SBA’s guarantee gives sureties an incentive to provide bonding for eligible contractors, thereby strengthening a contractor’s ability to obtain bonding and greater access to contracting opportunities for small businesses.
SBA can guarantee bonds for contracts up to $5 million, covering bid, performance and payment bonds, and in some cases up to $10 million for certain contracts.
If you need large infusions of cash and are willing to give up some equity stake and possibly some management control, consider pitching your investment needs to a private angel investor or a venture capital fund. Venture capitalists (VCs) assume more risk than bankers, but they expect greater return for their greater risk exposure.
Your ability to interest investors will be determined by the degree to which they believe that your technology and company represents a good business opportunity. You may love the technology you own or have licensed, but investors are more interested in what returns they can expect.
If you go this route, seek “smart money” investors. They are angels who not only want a good return, but take a personal interest in you and the innovation you wish to bring to market. Be careful of “return only” investors who simply view you and your technology as a way to make money. They are not likely to set the reasonable expectations and terms that allow you to make it through the many challenges ahead. According to Geoffrey Moore, author of “Crossing the Chasm,” you particularly need to make sure you have investors who will see you through the most dangerous period that can confront a new technology, when early adopters love your product, but the mainstream market does not seem ready. 
The ideal equity partner will not only bring money to the table, but also will also help you with business development and act as a mentor and coach. However, you will need to be realistic in your negotiations. They are in it for what they can get out of it, and will be looking for a reasonable exit strategy in a reasonable time period.New York has a strong and growing venture capital community (see Resource listings below) that includes private investors, and through Empire State Development, which runs the Small Business Technology Investment Fund, offers early stage and growth capital to technology companies. The New York State Common Retirement Fund’s Private Equity Investment Program has also expanded the availability of capital for businesses.
Through the local Small Business Development Center, you can also access SBA’s Small Business Investment Company (SBIC) Program, a public-private investment partnership created to help fill the gap between the availability of growth capital and the needs of small businesses. The SBA does not invest directly in small businesses, relying instead on the expertise of qualified private investment funds. The SBA licenses these funds as SBICs and supplements the capital they raise from private
Crowdsourcing, or crowdfunding, is a relatively new and fast-growing alternative to debt or equity capital for entrepreneurs. It got a big boost in April 2013 with the signing of the new Federal JOBS Act. Now U.S. start-ups and entrepreneurs can try to raise capital by offering equity, loans, and revenue share agreements through crowdfunding portals overseen by the SEC. Read more. EVE clients are urged to set up a paid account on EquityNet, a crowdsourcing site that matches angel investors and venture funds with startups.
 Geoffrey A. Moore, Crossing the Chasm, Collins Business Essentials, 2002 edition.
CAMPUS CAPITALIZATION ASSISTANCE
- RPI Emerging Ventures Ecosystem Resources
- Also go to your EVE Podio Account: on Capital tab add the Capital Checklist
- EVE Client EquityNet – Crowdfunding Site
- Funding Opportunities for RPI Student Entrepreneurs
- Introduction to Venture Funds
- Venture B Plan Series – Events for Pitching Your Plan
- Lally School of Management Business Plan Competition
REGISTERED EVE BUSINESS PROFESSIONALS
- Richard E. Honen, Attorney, VC
- Raimondo Archibald, Mgmt Consultant, Investment Banker
- Jim Lozano, Accountant, CFO for Hire
- Robert Hayes, Accountant, Serial Entrepreneur
CAPITAL REGION CAPITALIZATION RESOURCES
- Small Business Development Center
- Tech Valley Financial Incentives
- Tech Valley Financial Institutions
- Tech Valley Venture Capital Companies
- Upstate Ventures Association of NY (UVANY)
- New York Angel Investors
- Eastern New York Angels