From Gig Worker to Startup Company -10 Ways to Raise Capital
KEY POINTS
Capital infusions are often required to launch a startup and leverage scalability.
A well-researched Pitch Deck is a key component of any capital raise.
A capital raise may provide access to financial mentoring, networking, partnering, resource sharing, and more.
The gig economy provides significant income potential for hobbyists and professionals. However, it is not without its own myriad of risks.
The transition from gig worker to successful start-up can be a giant leap. It requires an entrepreneurial spirit, risk appetite, unwavering dedication, financial capital, and so much more.
Sweat equity (working and building capital while not being compensated) can only go so far. At some point, the need to raise capital challenges most entrepreneurs. This can create a seemingly insurmountable obstacle (recall the “W” from the SWOT analysis). Fortunately, entrepreneurs have their own perspective through which to view obstacles.
“Obstacles are those frightful things you see when you take your eyes off of your goals.”
Let’s consider the preparation required prior to actively seeking capital from third parties.
Raising Capital – Create a Pitch Deck
A well-conceived pitch deck is a clear and concise visual presentation that entrepreneurs and business professionals use to communicate their ideas and attract potential investors, partners, lenders, and clients.
The series of slides may highlight key aspects of the business, specific problems it solves, market opportunities, a unique value proposition, bio-sketch of critical team members, financial projections (budgets and cash flows), and growth strategy.
The following elements are key components to consider when developing a pitch deck.
Cover
This should include basic contact information (e.g., company name, address, phone number, logo). It may also include the company’s catch tagline. For example, Nike may include their catch phrase,
Just Do It
Vision and Mission
Simply state your company’s vision and mission statements, if applicable. Google provides a great example of the complimentary nature of each statement.
Vision Statement
To provide access to the world’s information in one click.
To organize the world’s information and make it universally accessible and useful.
Executive Summary
Provide a succinct overview of the business. Highlight differentiating factors, the value proposition, target market, market potential, and growth projections.
Include an overview of the purpose of the loan and how it will contribute to the overall success of the company. For example, clearly indicate if the loan will be utilized for research and development, capital equipment, inventory, physical expansion, talent acquisition, or other purposes.
Opportunity
Clearly articulate the market opportunity to be exploited or the problem to be solved. Explain the market demand and why the company’s solution is necessary.
Value Proposition
Describe how the proposed product or service will take advantage of the opportunity. Be sure to highlight any proprietary intellectual property to be utilized, key features and benefits, and any competitive advantages that can be leveraged.
A high-level roadmap should take the audience from today, through the loan utilization process, experience of reaching the stated goals, and forward into the future.
Your ability to be scalable and handle the increased volumes will be critical to your success. Be sure to include references to the scalability of relevant systems and processes. This may include hardware, software, and automation tools to streamline operations while improving efficiency.
Market Analysis
It is critical that you can clearly define your target market based on reliable research. Such details may include the target market’s size, growth rate, key trends, demographics, and more.
You must illustrate the unique nuances regarding your target market’s wants and needs.
Competitive Landscape
Provide an overview of the key competitors in the market space and the existing barriers to entry for new participants. Barriers to entry may include cost, technology, research and development, regulatory compliance, human capital, and more.
Demonstrate the company’s competitive advantage and how such can be leveraged to gain market share.
Financial
Provide a brief overview of the key financial drivers of the company. Such may include revenue streams (services and/or products), sales channels (e.g., physical store, ecommerce, social media, marketplace, direct sales), and pricing strategy.
Present the historical financial statements, if applicable, including balance sheets, income statements, and statements of cash flows. Key financial ratios can be highlighted and compared to industry averages.
Explain the funding requirements and how and when the funds will be utilized.
Include profitability projections that include revenue, expenses, and gross margin. Value can be added by breaking such down based on the financial drivers noted above and projecting the change in the historical financial statement ratios.
Cash flow forecasting is just as important as profitability forecasting as the two are rarely equal. Lenders want to know if the business will be profitable and be able to service all debt obligations.
Marketing and Sales Strategy
Outline the marketing and customer acquisition strategies. Such may include content marketing, search engine optimization, email marketing, events, partnerships, and more.
Reference can be made to any customer retention systems and strategies that will be employed to track customer interactions, provide enhanced service, and offer ongoing support.
Team
Provide bio-sketches for all key team members highlighting their experience and qualifications. Similar information can be provided pertaining to board members or external consultants.
Risk Analysis
Highlight key risks faced by the company. Such can be identified internally by performing a SWOT analysis. Each risk identified should have a risk mitigation strategy associated with it.
Creation of the above pitch deck will put the company in a position to contact third parties for financing. We highlight the following,
Top 10 Ways to Raise Capital
1 - Bootstrapping
Self-funding is the first place to start when financing your business. Afterall, third parties are unlikely to provide capital if you have not fully committed your time and resources.
The concept is relatively straightforward.
Maximize revenue monetization strategies
Minimize corporate costs
Maximize productivity
Minimize personal costs
Sweat equity – accept the reality
2 - Friends and Family
Healthy relationships can be put at risk if you choose to approach family and friends for a loan or capital investment. Risk mitigation becomes critically important.
A key risk minimize strategy is to be clear, concise, and 100% transparent. Such is the case in any relationship, but it takes on a more intimate importance when dealing with personal relationships.
The presentation of the pitch deck above is a great way to keep the discussions professional and focused while minimizing the risk of misunderstanding. It also provides a tangible document to reference in the future, if necessary.
All financial transactions should be formalized in legally binding agreements.
3 - Grants
A company may be eligible to apply for and obtain a grant from various organizations including the government, non-profits, and private entities.
The first step in the process is to determine the pool of grants available. Such can be derived from government websites, business associations, chamber of commerce, and foundations.
Next, determine the eligibility requirements of each grant and if the company satisfies such requirements. Eligibility may be based on a combination of business size, industry, location, target market, and social impact.
It is recommended that grants are applied for as early as possible as the review, approval, and funding process can take a few weeks to several months. Be prepared to complete the requisite documentation and provide supporting documentation (e.g., pitch deck noted above) that may include a business plan, financial statements, bio-sketches of key members, and more.
4 - Personal Loan
A personal loan is typically less expensive and quicker to implement than a business loan. For example, a home equity line of credit can be accessed to borrow funds and lend such to the company.
However, you are legally responsible for the loan from the bank. Therefore, your credit score and personal finances will be negatively impacted if the company is unable to repay the loan.
5 - Small Business Administration Loan (“SBA”)
Some countries offer SBAs that are designed for small businesses. Such may be a great option for start-up companies that cannot qualify for a conventional business loan.
In the U.S., SBAs generally have rates that are comparable to non-guaranteed loans. They may require lower downpayments, flexible overhead requirements, and no collateral needed for some loans. Some come with continued counselling and educational support.
The favorable lending terms are largely because the U.S. Small Business Administration provides a partial guarantee to the lending institution.
6 - Business Loan
A conventional business loan may provide higher financing limits than a personal loan. The company is liable for the loan; therefore, any loan defaults do not impact on the company’s shareholders.
However, lenders may require personal guarantees from the shareholders. Such is common when obtaining financing for a start-up company.
Shareholders of small businesses are often appointed directors. Directors can be held personally responsible if they provide personal guarantees or indemnities. It is possible for creditors, in certain circumstances, to pierce the corporate veil and make directors personally liable.
7 - Angel Investors
These investors are wealthy individuals or families that invest on their own behalf. They are typically seasoned entrepreneurs that can provide valuable business insights.
They often invest in high-risk start-ups in exchange for an equity stake in the company. Such is typically in the form of shares or convertible debt.
The percentage of ownership exchanged is deal dependent. It often ranges from 10-20% but can dramatically exceed such a range.
8 - Venture Capitalists
Venture capital firms consist of a group of professional investors. Such may include individuals, family offices, foundations, pension funds, and corporations. They may possess a higher financing capability than angel investors while also being able to provide valuable strategic planning guidance.
Investments are often made through a limited partnership (“LP”). Each investor contributes to the LP while becoming a limited partner. A single General Partner (“GP”) will manage and administer the LP. Each limited partner will meet capital calls issued by the GP to fund new investments.
9 - Crowdfunding
This involves raising funds by collecting small contributions from many people. The size of each contribution may vary. Such funds are typically raised through various on-line platforms.
There is no limit to the type of project or venture that can be supported by crowdfunding. Some common categories include board games, video games, films, music albums, social causes, products, books, magazines, and so much more.
Equity Based Approach
Investors contribute money in exchange for shares.
Rewards Based Approach
Investors contribute money in exchange for rewards. Such rewards are typically tiered based on the contribution size and may include product access, exclusive merchandise, and personal experiences.
Peer-to-Peer Lending
This model facilitates lending from individuals or groups of investors directly to a startup. The online platform eliminates traditional financial intermediaries (e.g., banks, venture capital firms).
Once the loan request is approved by the platform it will be listed on the marketplace. Investors can assess the company disclosures and make a microloan, at their discretion. Loans are typically repayable monthly (principal and interest).
10 - Incubators and Accelerators
Incubators
Incubators provide a wide range of resources to help a start-up grow and succeed in exchange for a fee or equity stake. Such resources may include,
Business Plan
Mentoring and guidance to assist in developing a business plan including the vision, mission statement, strategic goals, and a tactical plan to achieve such goals.
Physical Space
Access to office space, shared space, or laboratories. Such can reduce costs while promoting collaboration with likeminded entrepreneurs.
Networking
The incubator may put on workshops, seminars, and other networking events to connect startups with investors, potential partners, and customers.
Accelerators
Accelerators typically work with more established startups than incubators. These companies are still in the startup phase, but they are preparing themselves for rapid growth over a target period often ranging from 3-6 months.
Accelerators may offer many of the same benefits as incubators; however, accelerators typically focus on scalability and preparing the company for additional further investment.
BOTTOM LINE
There are many options available to raise capital. Some provide more than just funding and may include mentoring, networking, resource sharing, and more. Whichever direction you choose, do your research and prepare a clear and concise business plan that will convey your vision to your audience.
