How to Fund Your Idea – Part 2

The different types of funding can consist of yourself (both your savings and IRA), your friends & family, angel investors, strategic investors, private equity/VC funding, and going public.

Most people don’t realize that if you really need the financing, you can also invest your 401-k in yourself or your business with a self-directed account without having to pay a penalty. I view this as more of a back-up plan option if all your other options don’t seem to be working and you think you might not even make it to retirement if you don’t do something now to save your business.

Angel investors have typically made their own money in their own businesses and have a desire to transfer that knowledge to other businesses. Keep in mind that angel investors typically like to run together, so if you’ve found one angel, you’re likely to get seven or eight that would like to tag along with them and each one will invest anywhere from $25,000 to $250,000 each.

Strategic investors are people or companies that will receive a benefit from your business more than just their investment. For example, both your suppliers and your customers would be considered strategic investors. If you’re looking to potentially do an M&A deal, you will most likely be selling to a strategic investor, and so if they’ve invested in you, then they will be more likely to acquire you down the road. The reason most strategic investors will consider acquiring you is because you’re also selling to their competitors and they want to control your product/service in order to get a leg up.

Private equity and venture capitalists look for companies that will really make it big and then they help those companies either go public or sell to a strategic or other financial investor later on. They typically expect to get 3x-10x their money back in a five year period and they often expect only one out of five of their investments to really be a home run. Keep in mind that both the private equity and VC industries tend to be a very closed loop of people and they will often be very vocal about your business and ask for board seats.

Going public is often the ultimate goal for most companies, but it’s actually like creating a second business because there is a lot of added effort going into the process including government reporting, reports to shareholders, reporting to the markets, etc. However, it remains one of the best ways to raise big chunks of money and exit out of your investment.  It can be a very expensive and long process though (expect it to last at least 6 months and cost more than $100,000).

Another option to consider would be a reverse merger, where you would team up with a company that has been public a long time, but the business has been shut down, and it has decided to still keep the filing process going. In a reverse merger, one company acts as the shell corporation and your company aims to absorb the shell and reverse the name of the company (i.e. it’s a “reverse” merger because your company takes over the business and name). The reason most companies might not operate anymore but continue to file is because they know that the shell has value and it’s beneficial to other companies because it saves time and money when doing an IPO.