How can I raise investment capital for my startup?

Hi Katya,

There are two ways in which you can raise capital. The first involves the sale of company shares(an equity offering) and the second involves issuing debt. Issuing debt, as I'm sure you're aware, involves payment of interest as compensation for investors who lend you money for your business. On the other hand, issuing equity allows you to sell ownership rights to your business. Keep in mind, however, that the shares you sell may also include voting rights which would give investors some degree of control over your business (perhaps even the ability to fire you as the head of the business). So, as you can see, each method of raising capital has its pros and cons. One thing that can definitely help you in either situation is having a detailed and conprehensive business plan. Such a plan would detail where the business has been, where it is now, and where you see it going in the future. Ideally, it should also include a SWOT (Strengths, Weaknesses, Opportunities, and Threats) Analysis, which helps to differentiate your business from current and potential competitors and allows investors to gain a deeper understanding about the direction in which your business may be headed. It should also clearly illustrate how you intend to put investors' money to work and earn returns which compensate them adequately for taking the risk of investing in a new venture. I hope you found this helpful. If you have any additional questions, please feel free to reach out.

Good luck with your new venture!

Best, Alex

I've bootstrapped and sold a company before. We each put in $400 of funds and built the company into what it is today. I'll admit that this is a sample size of one, but I'll relate my thoughts about fundraising.

1. You don't need to borrow money. There are plenty of people who make custom foods from their own homes without investing a ton in specialty ovens, kilns, and the like. http://glendascustomcakes.com/ is an example.
2. Look for creative sources of capital. Surely there are bakeries/donut shops/restaurants in town which are not open 24 hours a day. Can you work out a deal with them where you can use their equipment during the off hours? They get a little rent money, and you get to use their equipment without a capital investment or a lease.
3. Make sure that you have real customers who are willing to pay money before sinking a lot of your own money into the venture. It's one thing to have friends say "I'd love to buy your cakes" and another for them to fork money over when it comes time to actually buy your product.
4. Aim for subscriptions. Look to sell a bundt-of-the-month club or whatever it is. That will be the surest way of getting recurring revenues.
5. Stick to the 6 months/$1,000 rule. I explain the rule here: http://www.hullfinancialplanning.com/an-alternative-to-stocks-for-your-5-at-risk-capital/

Good luck!

Katya - You have a few options available to you. In addition to various types of financing, another option is to raise equity capital from friends and family through a private placement. The best way to explain an equity offering is that you are offering a share of your business in exchange for an investment of risk capital. This option can be relatively straight forward or very complicated, depending on how much money you expect to need, whether you have any familiarity with the rules governing private offerings, whether you have family members or friends who might be willing to back your new venture, and what type of documentation is ultimately required. The legal costs of putting together a deal can be expensive, so you will want to speak with an attorney and consider all of the launch costs before you proceed. There are a number of online resources that can provide more detailed information. The Small Business Administration is a good place to start. Good luck to you.

There are four basic sources of equity financing for most small businesses. First, there's your own money that you invest into the business. The next level is called "friends and family." These are people you know or friends of friends. The next two levels involve getting money from professional investors - one is called Angel and the other is called Venture Capital. It's unlikely that a brand new small business will get money from professionals right out of the shoot. However, you can try. Google "angel investor" resources on the internet. But don't get your hopes up too high. Most startups begin with their own money and some bank financing (loans). They may seek investments from friends and family next. You'll need a great idea, business plan, executive summary of the plan, presentation, and some legal advice from a qualified, experienced business attorney. Once you have a proven track record of success, then the professionals may be interested.

Make a business plan and determine if you might be a minority business person, i.e. female, ethnic, disabled, Once you have a complete well thought out business plan in hand head over to the small business administration to present your case. Your local university can assist, since most have business development specialist on their staff. Now go forth and do battle for your dream of being an entreprenuer.

For your type of start-up, you might try to raise equity capital through a private placement memorandum. This offering would have to be registered in your state and offered to accredited investors. Another option may be through obtaining orders for your bakery products in advance. If the customers are large, well recognized concerns, they could be bankable in the form of an A/R line of credit. If you need to equip your bakery, there are specialty lease finance companies that will bank you if the assets have a well developed liquidation market. Best of luck in your venture!