Securing Financing

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SECURING FINANCING

Financing of some sort is required to launch nearly all new businesses. Many entrepreneurs decide to use their personal savings, personal lines of credit, or loans from friends and family members. Some new business owners avoid seeking venture capital from outside sources because most venture capital firms actually purchase a portion of the company they are funding, and as a result, they quite often take control of the firm's strategic development. However, many entrepreneurs are willing to give up a certain degree of control in exchange for outside funding.

EARLY SUCCESS

For U.S.-based Internet start-ups, securing financing proved relatively easy in the mid-and late 1990s because of widespread interest and financial speculation in e-commerce. As a result, venture capital firms that focused exclusively on Internet markets emerged. E-commerce entrepreneurs could also turn for support to dot-com incubators, firms that allowed start-ups to grow in-house before venturing out on their own. Many venture capitalists and private investors awaited their return in the start-up's initial public offering (IPO), when shares were released on the public market and prices sometimes skyrocketed.

CONFIDENCE FALTERS

In 2000, though, investors began to temper their funding of unprofitable dot-coms. When dot-com stock prices tumbled as a result, sources of funds for e-commerce ventures began to evaporate. Unable to secure additional capital for expansion, many young businesses were forced into bankruptcy, further undermining the stock prices of remaining Internet ventures. A weakening economy exacerbated the problem, and venture capital firms and banks grew increasingly reluctant to invest in new Internet ventures. As a result, compared to the 1,634 companies that had raised $23.9 billion in venture capital funds during the third quarter of 2000, only 540 companies raised $6.7 billion during the same period in 2001.

SEEKING FUNDING

If you are looking to secure funding for your business, be aware that funding options are certainly more limited for e-commerce start-ups than they were in the late 1990s. Banks and venture capital firms are quite often skeptical about the potential success of online ventures. These organizations continue to fund Internet start-ups, albeit at a much more reserved pace. As a November 2001 BusinessWeek Online article put it, "So here's how it works these days: The right company with the right technology and management in a potentially hot market is going to get a reasonable amount of money—but probably not much more than it needs to achieve liftoff. That's venture capital today—the way it was before the Internet bubble began to inflate."

Your company's stage of development will determine what type of funding you seek. For example, companies that have not yet launched operations seek seed funding. Those that have recently opened for business apply for early stage investing. Established businesses seeking funds for additional growth can ask venture capitalists for expansion stage financing. In addition, you can always consider looking for a wealthy individual willing to fund a start-up; these individuals are known as angel investors.

PLANNING TO BE FINANCED

No matter what type of funding you seek, you will need to submit a business plan that details exactly how you plan to launch operations, secure customers, and make a profit. Be as specific as possible. The most successful business plans establish a clearly defined target market. Also, the online companies most likely to secure funding to are those with a business plan based on a proven business model. Lending institutions want to see that your venture can produce sales regardless of whether you are able to sell advertising on your site, generate high levels of traffic, and so on. According to PricewaterhouseCoopers venture capital director Kirk Walden, as quoted in the February 2002 E-Commerce Times, non-core sales like advertising are no longer considered an acceptable source of projected revenues in a business plan. "Your revenues can't come from anywhere other than selling the products you're designed to sell."

Quite often, if a funding institution likes your business plan, they will ask that you to present your ideas in person as well. According to a November 2001 article in E-Commerce Times, "a live or semi-live demonstration of the product that lets the client 'do some of the driving' works best" to help potential funders understand exactly how your business will work. It also indicates that you understand this as well. Rather than using buzzwords or catch phrases, it's best to explain yourself in clear, straightforward language.

Along with a solid business plan and a convincing presentation, most funding companies are also looking for concepts that are ripe for current and future market conditions. A fast-growing market is ideal. For example, after the burst of the dot-com bubble, online luxury-item merchants continued to secure funding because investors believed that the individuals able to afford those items were not likely to be affected by the recession. As a result, jewelry e-tailer BlueNile.com secured a $7 million round of financing from Bessemer Venture Partners, Kleiner Perkins Caulfield & Byers, and other venture capitalists in 2001. In addition, Winetasting.com secured a $5 million loan from an individual investor. While luxury e-tailers were not the only online companies securing financing in the early 2000s, their success does reflect the importance venture capitalists place on favorable market conditions.