by Mason Myers, general partner of Greybull Stewardship business investment fund
“Tell me what you eat, and I will tell you what you are,” said French lawyer and epicure Jean Anthelme Brillat-Savarin. Similarly, tell me where you got the investment for your business, and I will tell you what is in store for your business.
As you compete in the IGC or think of financing for your startup, it is important for you to think about the type and source of investment that you may want. This is particularly true if you are pursuing a lean startup strategy, which opens the universe of potential financing and funding sources much wider than it otherwise would be.
Each type of capital investment has pros and cons. Each type is perfect for certain circumstances. As startup founders, the key is for you to understand the differences and find the investment financing that is best aligned with your strategy. Some people may feel that finding investment financing is difficult enough, let alone finding the perfect investor. Counter-intuitively, I believe your best opportunity for finding financing is to find the investors who are best for you. For every minute spent defining the type of investment that you need, you will save many hours of lost time and energy down the road.
The three most common sources of financing are venture capitalists (angels and micro-VCs also fit into this category in my book), private equity firms, and strategic investors. Venture capitalists want amazingly rapid growth toward huge markets and exit in three to five years. Private equity firms want to use debt to buy companies, pay down the debt, and sell in five years. Strategic investors and buyers want to change your company to fit into theirs.
Lean startups, in particular, have many other options as well because they can produce products and iterate with much smaller amounts of capital than years ago. So, any source of financing that can allow you to release and improve your product without selling too much of your company or losing too much control is a good source of capital. The more creative you can be to get your startup to the next stage or past the next milestone with inexpensive funding (meaning little loss of equity or control), the better off you will be.
Even so, for most startups, venture capitalists will be the financing source that first comes to mind. It will be perfect if your enterprise fits into their profile (huge market, rapid growth, very scalable products and services). However, that is not every startup. If your idea doesn’t fit that model, then save yourself a ton of time and headache and don’t worry about the venture capitalists. Focus on other sources of financing in the form of angels, high net worth individuals, or other sources like corporations that may have a reason to invest in what you are doing.
The best source of financing for a young venture? Customers. There is no better way to finance and grow a business than from actual customers. A business model that has people pay up front or pay early has a chance to make it a long way with customer financing. Then, if you find you need financing in order to overcome a hurdle in growth, you’ll be able to prove to financiers that you have a viable startup, which may give you more leverage.
In life, you are what you eat. In business, you are where you get your financing.
Greybull Stewardship Business Investment Fund provides business financing & funding sources in support of a company’s unique growth.
Mason Myers, general partner of Greybull Stewardship business investment fund, offers expertise on business financing & funding and business management on his business financing blog.