Business Financing - January 14, 2012

When launching a new company from the ground up, entrepreneurs have a tall order of tasks that must be completed efficiently to ensure long-term success. Entrepreneurs are looking to introduce a product or service to a market, fill a needs gap and build toward growth through hard work and responsible use of resources. While determination, a good work ethic, business-savvy and a little bit of luck can all play a role in the performance of a startup in the first few months of conception, every entrepreneur must seek out a source of funding.

Although many entrepreneurs may prefer to spend time and energy on product development, creative marketing and resource acquisition to turn a business concept into a thriving enterprise, obtaining financial backing is a must in the initial phases. Entrepreneurs should research all available sources of capital to cover initial implementation costs and investment in resources such as employees and technology. Because the economic downturn has brought scrutiny onto the financial sector, many major lenders are offering significantly fewer loans to small businesses, reserving capital for more conservative projects. As a result, entrepreneurs are actively seeking out new, alternative forms of financial support in the private sector, taking advantage of the latest communication tools and online platforms.

Before a business idea becomes an industry success, entrepreneurs must convince investors of the product's or service's value. Sources of financing must then trust the business owner to use the resources wisely deliver a high return on investment.

Because the cost of launching a startup is relatively low, depending on the industry and reliance on technology, many new businesses can get off the ground on limited budgets. Each participant in a crowdfunding effort can invest small amounts toward the business or offer large contributions if they want a greater share of the enterprise. As crowdfunding is built on the idea of power in numbers, each investment is typically small by comparison to a business loan, but add up to significant financial support when multiplied by a large population of online supporters. The online platform used for crowdfunding offers entrepreneurs an affordable channel through which to communicate with potential investors, creating an interactive environment to introduce the concept and demonstrate its value and growth projections over time. Social communication tools allow for discussions on the business plan, as well as opportunities to keep investors abreast of the latest developments and st rategies within the company to demonstrate how funds have been allocated.

When developing a crowdfunding strategy and campaign, entrepreneurs should identify the key audience that would respond most favorably to the digital sales pitch. Venture capitalists and other private funders that have demonstrated an interest in the respective industry should be targeted, as well as private equity funds and angel investors. To engage the different demographics of investors, entrepreneurs must lay out a clear and concise pitch that plays into the interests of these primary funders. Understanding what is important to the target audience, and what they consider to be of value in the market, will help entrepreneurs present the product or service as a useful tool to fill a demand with certain consumers. Defining the purpose and potential of the product or service in contexts the investors will understand and appreciate will help potential funders grasp the concept more clearly and envision its long-term success and sustainability.

There are a variety of crowdfunding types for entrepreneurs to choose from, each offering unique benefits. For a small business looking to raise capital for foundation and growth, the two main types are seed round funding and Series A funding. Seed round funding is often deployed by entrepreneurs to obtain financial backing through the proof of concept phase to the first stages of revenue generation. Seed round funding is typically raised before any sales have been made, and is heavily reliant on the demonstration of a concept's value to the market rather than hard numbers. When crowdfunding from this stage, entrepreneurs must acknowledge they are a high risk to potential investors, as they have little to offer to support their business plan's claims and predictions. Without proven sales and a business foundation in place, entrepreneurs will likely see investment in seed round funding from close supporters such as friends, family and colleagues.

Series A funding is typically associated with investment from professional financiers such as venture capitalists, angel investors or even banks. This funding will only be offered after a company has launched into the market, generated some revenue and has growth projections based on current activity. Series A funding is used to grow a company after the foundation has been laid and the enterprise has proven to make money. The target audience in this round of crowdfunding are professionals looking to make money through investments as a career move, who have sat through many pitches and have certain requirements that must be satisfied before funding is offered. To appeal to these investors, entrepreneurs must offer more than an engaging proof of concept and business plan, and generate reports and charts on how the business has grown and evolved from the launch, and what strategies are in place to sustain this growth in to the future.

You may also wish to sell your business or concept to an investor. Aspiring business owners who want to purchase a company through their 401(k) or IRA may provide another source of revenue for you, if you are not set on running the organization yourself.

Of course, crowdfunding and investors are just one way to gain funding to start a business. There are a host of alternative options, and startup entrepreneurs have to find the best choice for their unique purposes. Crowdfunding campaigns enable entrepreneurs to engage potential supporters online with instant and interactive communications, as well as process payments quickly from remote locations. Because the investments are in smaller amounts and more participants are involved, entrepreneurs can pitch the business plan to a wider audience of investors with varying interests. Rather than relying on successfully selling the concept to a few bank representatives under stringent regulations, entrepreneurs can appeal to different perspectives to generate widespread support and financial backing. The use of social technology empowers numerous seemingly insignificant investment amounts to join forces in support of a concept from its birth.