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Financing Options for Small Businesses: Crash Course Entrepreneurship #16 - YouTube
Channel: CrashCourse
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It took $10,000 to launch my apparel line,
Ghost and Stars.
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I donât know about you, but when I was just
starting out, I didnât have that kind of
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cash just lying around.
[13]
Enthusiasm and super soft cat sweaters are
great, but they just donât pay the bills,
[16]
ya know?
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I needed to save up money through my other
side-hustles, or I needed an investor -- someone
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who believed in me and my idea enough to give
me money in exchange for (potentially) more
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money in the future.
[28]
And if I hadnât been brave enough, I wouldnât
get to put my designs out into the world for
[32]
people to enjoy.
[34]
But now itâs your turn.
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So letâs find the right investor for you,
because each has its pluses and drawbacks,
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and itâs time to fund your dreams.
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Iâm Anna Akana, and this is Crash Course
Business: Entrepreneurship.
[45]
[Theme Music Plays]
[54]
This episode is near the end of this series,
but entrepreneurship isnât a linear journey.
[59]
You might need funding to accomplish any of
the steps to build a business, not just when
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youâre ready to take a product or service
to market.
[66]
Some people look for money for their minimum
viable product.
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Some market their product or service once
everything is set up.
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And if you believe Silicon Valley legends,
a few people get funding with just an idea.
[78]
But where should we look?
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Start with the Three Fs: Friends, Family,
and Fools.
[86]
And calling them fools sounds kind of mean,
but weâre NOT trying to trick anyone -- this
[90]
is just part of the quirky entrepreneurial
jargon.
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These people are often the first stop for
an entrepreneur, because they believe in us
[97]
the most with the least amount of evidence.
[100]
According to the crowdfunding site Fundable,
the three Fs invested 60 billion dollars -- three
[105]
times as much as angel investors -- in budding
entrepreneurs in 2014.
[110]
Thatâs right.
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Billion.
[112]
With a B.
[113]
More seasoned investment pros -- like banks
or venture capitalists -- will get bogged
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down with âproof of concept,â âfinancial
performanceâ, or needing it âto be more
[120]
than a stick figure sketch on a notepad.â
[122]
But the three Fs are more likely to be team
us.
[126]
A lot of this early-stage money is in small
amounts to help create a prototype, get design
[131]
software, or travel to meet with a prospective
partner.
[134]
These moves can open a lot of doors, but they
might not interest professional investors.
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The disadvantage of asking everyone you know
for money is that you might fail, and then
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youâve brought someone close down with you.
[145]
If you take this path, be honest about the
risks involved, and donât ask for more than
[149]
someone could lose.
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The main advantage is that you typically get
to keep ownership of your company, and your
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success is their success too.
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And if grandma does drive a hard bargain,
at least the business is in the family.
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Letâs go to the Thought Bubble to see how
we might actually make a funding ask.
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Ryan has so many books that heâs started
storing them in plastic tubs.
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His taste is renowned, his online review blog
has a pretty big following, and all his friends
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ask for recommendations.
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Ryan also loves travel.
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So to combine his loves, heâs struck with
inspiration to start Library on the Loose
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-- basically a food truck but for books.
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He knows he can use his massive collection
as inventory, and he can probably work with
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a local bookstore to sell some of their new
titles.
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But buying a truck would be too expensive
for him right now, so he wonders whether some
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close friends would help.
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Ryanâs super nervous, so heâs going to
use four tips that entrepreneurs recommend:
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One, ask for a specific amount of money for
a specific goal.
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Two, let people see your investment and commitment.
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Three, communicate the plan and identify risks
upfront.
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And four, talk with an attorney to structure
the deal.
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So Ryan combs through the internet and finds
the perfect truck -- a 2006 Freightliner step
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van -- for $15,000.
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He then asks his four closest friends to meet
him for coffee and warns them he has a business
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proposal.
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Ryan opens by telling them his dream of Library
on the Loose and shows them the picture of
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the truck online.
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He mentions his booming review blog and how
heâs successfully sold some of his collection
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from a mobile bike bookstand.
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Then, he makes the ask and proposes that they
all put in $3000 to buy the truck.
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Itâs a risk, but in exchange, heâll be
transparent about his accounting, pay them
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back over 3 years, and everyone gets free
book suggestions for life, which heâll have
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his lawyer acquaintance Kim put down in writing.
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The decision is up to his friendsâ now,
but everyone seems excited to be included.
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Thanks, Thought Bubble!
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Those four tips can apply to any entrepreneur
asking anyone for funding, although the Three
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Fs are a common starting place.
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But maybe family and friends arenât an option,
or we want to cast a wider net!
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Non-equity investment crowdfunding platforms
let us pose an idea to the internet.
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Crowdfunding is pretty simple and involves
platforms like Kickstarter, IndieGoGo, or
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GoFundMe.
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We can create a post with info about the product
or service weâd like to make, and then set
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a funding goal and a time limit.
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Anyone who gives money will be sent a perk.
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For instance, if youâre trying to fund a
new multi-sensory meditation pillow, backers
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might be sent a guided meditation if they
pledge $25, or maybe an early version of the
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pillow if they pledge over $50.
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Sounds awesome, right?
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You get funding, validation testing, and a
customer network all in one.
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And a big plus is that crowdfunding lets you
keep total ownership of your company.
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But itâs a lot of work to run a successful
campaign, starting with researching the platform
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you like the most.
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Maybe some platforms have higher success rates
or tend to feature products like yours.
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A quick search through past campaigns can
reveal how many reached their funding goals
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or help you think about why some products
failed -- like, the idea mightâve been half-baked.
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And just like paying attention to competing
businesses, we want to pay attention to what
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other crowdfunding entrepreneurs offer as
rewards.
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We may be able to offer something unique,
but donât fall into the trap of over-promising
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and under-delivering.
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A customized all-in-one house cleaning robot
could take YEARS to manufacture, while a sticker
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with your logo would be just fine.
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Plus, on some sites, you could still end up
with $0 if you donât hit your goal.
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Kickstarter, for instance, requires a project
to be 100% funded before any money is paid
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out.
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To avoid taking money directly from people,
a traditional bank loan might be an option
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-- although banks arenât usually the first
stop for entrepreneurs.
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It can be difficult to get a bank loan when
we donât have many assets or proof of stable
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revenue over time.
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Banks like to know weâll pay them back!
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And weâre just not there yet as a new entrepreneur.
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So start building a relationship with a business
loan officer when you open your business bank
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account.
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Take time to go into a branch and let them
know what youâre up to.
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Developing this relationship can pay off in
the future when you want to take out a loan
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or a line of credit, or even when times get
a bit tough and you need advances on payroll
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or deadlines extended.
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It never hurts to have more people in our
corner.
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To pursue a loan, remember to check what the
bank likes to see from a business plan.
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Youâll definitely need financial data, but
they may be satisfied with a succinct 5-8
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pages on the rest of the business if you tell
a good story.
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A formal loan can be hard to get and comes
with a formal schedule to pay it back.
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And if you canât pay, they make take something
else you own, like your car.
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But your success -- or failure -- is all your
own!
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Many non-US countries also have lenders that
focus on microloans and helping community
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members get ventures off the ground, but we
canât get into the nitty-gritty here.
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If weâre okay not having complete ownership,
investment-based financing involves selling
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a piece of the company to interested people
who become shareholders and partially own
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it.
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This path often begins with an angel investor,
or someone with a high net-worth and an interest
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in helping small businesses and entrepreneurs.
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They usually like to be hands-on with early-stage
entrepreneurial ideas, and invest less than
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$100,000.
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The typical venture capitalist is an investor
or firm representing several investors that
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focuses on startup companies.
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They often take a âhigh risk, high rewardâ
approach and invest much more money than an
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angel investor, hoping to get more profit
down the road.
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The advantages of turning to investors is
the ton of cash upfront, and the expertise
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from people who have already done what youâre
trying to do.
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But on the flipside, investors expect a lot
in exchange for so much money.
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The more investment capital you get, the less
ownership (like profits and voting rights
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to make decisions) you hold onto.
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Thereâs also a lot of business-y buzz around
accelerators or incubators, which are programs
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designed to accelerate the growth of a company
so it becomes more profitable faster.
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Techstars, Y-Combinator, and Boomtown are
accelerators behind some of the biggest startup
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success stories.
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They usually come with mentors, paths to fast
customer discovery and acquisition, and are
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often venture capitalists in disguise --
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which isnât a problem, just something to
be aware of, because of similar disadvantages.
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You may have to give up some ownership to
get involved with these perks.
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And if you donât know where to find investors
but youâre still willing to give up ownership,
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thereâs also a crowdfunding approach called
equity crowdfunding.
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This allows anyone to pledge funds, but instead
of receiving rewards, they receive slices
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of ownership.
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This has been a game-changer in places like
rural America where venture capitalists are
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scarce, but communities are strong.
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An advantage of equity crowdfunding is finding
people who really believe in your business.
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People who donât have the money to be a
traditional angel investor can help within
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their budget.
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And, like traditional crowdfunding, you can
take it to the internet to find more potential
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investors.
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However, the average successful equity crowdfunding
campaign only raises $7,000, and you have
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to give up partial ownership.
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Also, there are some serious regulations around
equity crowdfunding that vary state by state.
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Finally, grants are given by companies, foundations,
and federal or state governments looking to
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support businesses and spur economic development.
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On the plus side, you get money without having
to repay anything or hand over ownership.
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In the US, check grants.gov for federal opportunities,
your stateâs department of commerce for
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state opportunities, and your city's economic
development agencies or tourism board for
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local opportunities.
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But on the negative side, grants are tough
to get because theyâre usually only allowed
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to fund specific things.
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There are also often strict reporting and
measurement guidelines that come with the
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money, and fulfilling these obligations can
take away from your focus on key activities
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or plans for strategic growth.
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The bottom line is: financing a startup can
be tricky.
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Go where your connections lead you -- whether
that be friends, angel investors, bankers,
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or yes, the internet.
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Next time, weâll wrap things up by talking
about growth and whether itâs always a good
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thing.
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Thanks for watching Crash Course Business,
which is sponsored by Google.
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And thanks to Thought Cafe for these beautiful
graphics.
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If you want to help keep Crash Course free
for everybody, forever, you can join our community
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on Patreon.
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And if you want to learn more about negotiation
with people, check out tips from Crash Course
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