CHAPTER 4 How Knowing Why You Need It May Help You Get It

B. Getting capital to meet the demands of your growing business:

Many times businesses can experience a growth in terms of demand for their products and services and find that they do not have the current finances needed to try to meet the demand of their customers. This can be an extremely stressful situation because one may feel that they have done everything right, but not having the funding needed to meet an increase in demand can bring some discouragement to a business owner. Oftentimes traditional banking methods may be a challenge in some of these situations. One example that many people have witnessed during this phenomenon is on the popular show Shark Tank, where businesses are forced to give away significant equity in order to reach the aim of funding the increased demand.

C. Getting funding to meet a purchase order from a client:

Sometimes businesses just get one big purchase order that can significantly increase their revenues that they are hoping would be the beginning of a trend. Although it may be the precursor of businesses to come, many businesses are faced with the financial challenges of trying to meet that need for the purchase now, and do not see what to do when there isn’t a family member or friend who can write a check for them. In addition, many banking institutions may want to wait for the business to demonstrate that this opportunity will be the new reality prior to strongly considering funding the business.

In each of these instances above, there is a different set of strategies and things to consider. If you are starting a business, most entrepreneurs have to either self-fund, get family or friends to fund, or get their funding from a venture capitalist. I will assume that most people reading this book may want to know how to get the funds outside the self, family, and friend zones. So that will leave venture capitalists and traditional lending options to be discussed.

Venture Capitalist

From a historical perspective, venture capitalism has not been a business area that has benefited many startups. In the United States, private equity traces back its roots to over a hundred years. However, recent years saw a considerable burst in private equity as well as venture capitalism as we know it presently. This said, however, many businesses do not get funded by VCs. In the years before the present century, it is hard to conclusively determine how small business as well as startup founders got funds from venture capitalists. However, if fundable statistics are anything to go by, then it is safe to state that an extremely small percentage of startup ventures do actually receive funds from venture capitalists. According to the statistics, only about 0.05 percent get VC funding. Startup founders have to get personal loans from other sources to boost their ventures. This has been the trend over the years since the wake of the present century. In the following sections, this book will further discuss how hard it is to get VC funding, and especially more challenging if one is either a female or a part of a minority group.

The question pertaining to whether to go for VC funding or not comes down to a personal decision. On one hand, a startup founder may desire to break even in a short time and thus look for external funds from a venture capitalist. In such a case, the founder has to let go of a part of their business ownership, thus losing some of the stake to the funding VC. On the other hand, a founder may want to retain autonomy for their startups and thus opt to scale organically (Madden, 2018). In this case, the founder may experience difficulties along the way for lack of adequate funds. Thus, VC funding has its advantages. Startup founders have embraced funding, pushing it to an all-time high of $155 billion as of 2017, according to KMPG projections and statistics. This notwithstanding, it is worth noting that it is extremely difficult to land VC funding, as only 0.62 percent of businesses receive the funds. The odds are even worse if a founder is a woman or is a minority.

Venture capitalists deals often dominate headlines with the huge amounts of capital that they pump into startup ventures. One may think that a huge chunk of the startups swims in the stated huge amounts of funds, but the narrative is extremely different from what is depicted in the news channels. According to fundable, the cases in news headlines are a deliberate “big sticker investments” by the venture capitalists, aimed at enhancing their image. The in-depth scrutiny of startups together with founder scrutiny eliminate a large number of startups from receiving funding from the VCs. Consequently, over 57 percent of the founders have to use personal credit to obtain loans, while around 38 percent have to rely on close friends or family for credit to kick-start their startup ventures (Entis, 2013). Among the reasons that VCs cite for rejecting numerous startups are: a venture being in the wrong geographical area, a venture being in the wrong stage of growth, being in a niche that VCs are not interested in, slow growth, and lacking proper management. Often, a combination of these issues results in large numbers of startup ventures being denied funding.

In addition, women and minority business owners are getting an even smaller piece of the pie, something that is almost nonexistent. So if you are reading this book, this information is to let you know that VC funding is a very difficult task. In truth startup is the most difficult way to get funding out of the three scenarios mentioned above. There is one last way that people often attempt to get funding, and that is through a traditional bank loan. Most startups are not approved for a loan. The exception to this general rule is that I have seen franchises and business purchases get funding at a greater percentage than traditional startups. The reason that I believe that funders have been more open to considering a franchise or business purchase is because it is a proven system that has worked repeatedly. So many lenders may feel that there is less risk in funding a franchise. The new entrepreneurs that I have seen with the greatest amount of success getting funding is people who are buying a business. These are usually the easiest to get funded, due to the fact that there is usually the one thing that all lenders want to see: history. They could look at tax returns, they could look at profit and loss statements. There is data, so that they could plug into their formulas and find ways to mitigate the risk.

Being female can result in one being denied VC funds. In one example, Katrina Lake, CEO and founder of Stitch Fix, has come face-to-face with this inequality (Morgaine, 2017). Race is another major factor upon which founders are denied funding by white male VCs. The situation only gets worse when a founder is female and a minority. In 2018, over $85 billion were given out to startups by VCs. Out of that amount, only around 2.2 percent went to women founders. Worse still, only around 1 percent of that total amount was given to women of color founders (Zipkin, 2018). In her interview with VCs, Melissa Hanna recalled how they were overly concerned about her academic credentials. At the time, she thought it was standard operating procedure, due diligence kind of scrutiny, only to learn that it was due to her being female and black.

As of now, there are around 1,500 African-American startup founders in Silicon Valley. This translates to only 2 percent of the startup founders belonging to a minority group. An African-American founder by the name of Matt Joseph recalled the time when he needed to raise funds for his Locent IP, a startup providing businesses with text-marketing services, to no success, despite having an impressive resume (O’Brien, 2016). In his string of tweets and posts that he went ahead to post on Twitter and Facebook, respectively, Matt Joseph referred to the behavior of the dozen VCs as “pattern matching.” In his view, VCs like to fund businesses that remind them of past successes, such as that of Facebook’s Zuckerberg. In the case of Matt Joseph, this meant being matched with rappers and athletes. One of the venture capitalist was even bold enough to bring up Nas, a rapper turned VC. For Joseph, he is adamant that race is still a major impediment toward getting funding from the VCs. Matt Joseph went to Princeton and earned his JD and MBA from UCLA, and was backed by Y combinatory, which is an elite network for entrepreneurs and their businesses (https://money.cnn.com/2016/03/20/technology/y-combinator-locent-matt-joseph-race/index.html). His point was not of VCs being racist but bias because they are looking for pattern matching, which many of them noticed that he doesn’t look like Mark Zuckerberg, which is also impacting the subconscious bias against a minority entrepreneur such as himself. There has been some significant effort in addressing the bias in the VC community in a number of ways, but the point is that even without bias a very small percentage of startups gets funded.

Meeting the Demand for Growth and Purchase-Order Funding

I want to address the remaining two reasons why businesses look for funding simultaneously. In terms of if the business has a growing demand that they need capital for, or if they get a big order from Walmart or a really big customer and they do not have the funds to tackle that will be addressed. Another reason why businesses find themselves needing finances is because of an uptick in demand. Although this is a good situation, it could be pretty frustrating if you notice that people want your product and services but you do not have adequate capital to produce the services or products that your customers desire. Many times people see examples of this on the show Shark Tank. On numerous occasions, companies have orders that they can’t fulfill without an influx of capital. In some cases, businesses have the capital to actually produce the services or products but it puts them in a very precarious financial situation. Some financing options for businesses in this situation are what we call factoring and purchase-order financing. Although there is no abundance of companies that provide this type of funding, but if you find a lender that does this type of funding it would solve this particular problem without you having to give up all your operating income to fulfill an order. Factoring is when you have performed a service, you have billed for it already, but are in the process of waiting for the actual payment. Sometimes big contracts make you wait sixty days, ninety days, or even longer. If you are able to show a factoring lender your services that you completed, they are usually able to pay you anywhere from 60 to 90 percent of what you are waiting for. Purchase-order financing is even harder to find, but some organizations will also look at the purchase order given and make a determination on whether they will finance that purchase order for you. Doriscar Capital Group has a number of lenders that will work with some of these opportunities.

Reference List

Entis, L., 2013, “Where Startup Funding Really Comes From,” (Infographic) [WWW Document]. Entrepreneur. URL https://www.entrepreneur.com/article/230011 (accessed 11.24.19).

Madden, D., 2018. “Is It Time to Raise VC Funding? Ask Yourself These 4 Questions to Find Out,” [WWW Document]. Inc.com. URL https://www.inc.com/debbie-madden/4-reasons-you-dont-need-vc-money-for-your-startup.html (accessed 11.22.19).

Morgaine, B., 2017, “Venture Capital Funding and the Sexism You Can’t Quite Prove,” [WWW Document]. Bplans Blog. URL https://articles.bplans.com/venture-capital-funding-and-the-sexism-you-cant-quite-prove/ (accessed 11.21.19).

O’Brien, S.A., 2016, “Black entrepreneur to investors: Stop pretending like race isn’t an issue,” [WWW Document]. CNNMoney. URL https://money.cnn.com/2016/03/20/technology/y-combinator-locent-matt-joseph-race/index.html (accessed 11.22.19).

Zipkin, N., 2018, “Out of $85 Billion in VC Funding Last Year, Only 2.2 Percent Went to Female Founders. And Every Year, Women of Color Get Less Than 1 Percent of Total Funding,” [WWW Document]. Entrepreneur. URL https://www.entrepreneur.com/article/324743 (accessed 11.22.19).