There’s more than one way to fund a startup. Most startup founders climb the financing ladder. I was fortunate enough to actually jump down it. Hang with me on this post because it’s easier to explain how to go up the ladder and then I’ll show you how I accidentally jumped down it, but it worked anyway!
Like anything else financing tends to build on itself so the more money you have the more likely others will be able to contribute capital to your venture.
Here are the 6 steps of the financing ladder.
1. Sweat Equity or Seed Capital
The common starting point putting in your own money or more frequently is just your sweat equity. Getting your idea down, putting the time, energy, and effort. That is really the beginning, what we call seed money, the small amount of capital provided to an inventor or entrepreneur for seed capital. This may involve product development or researching the market as well as bringing on a management team and developing a business plan.
2. Startup Capital
Next is the start up. Start up capital is completing product development and initial marketing. The company may be in the process of organizing or they may be in business for a year or less but have not sold their product commercially so this is still pre-revenue. Usually these kind of firms have done the market study, assembled their management team and developed a business plan and they’re ready to go. That’s the definition of a start up.
3. Early stage private financing
This is kind of my sweet spot. Getting capital to companies that have expended their initial capital, their angel round, or friends and family round. Often in developing and market testing a prototype they require funds to go into full-scale operation, manufacturing, and sales. If it was a web property their site is up and running now they need to blow it out.
4. Expansion financing
This is working capital for expanding the business. Your business has to be showing growth at this point and this is how to accelerate that growth. This is where business accelerators fit in. Everything is proven, you’ve got it going, you’ve made progress but this is pre-profit. You’re spending money, you need more but there is plenty of traction in the business.
5. Late stage financing
This is capital for major expansion of a company whose sales volume is increasing and it’s breaking even or profitable. Funds are used for further expansion either in manufacturing, marketing, working capital, or development of an improved product or maybe an extension product.
6. Acquisition financing
Finally is growth through acquisition. Acquisition financing provides funds to finance an acquisition of another company. It’s as simple as that. Management or leverage buyouts and management buyouts are the buzzwords.
How I Jumped Down The Financing Ladder
When I was a young software engineer I was called into a room with a few of the big bosses at the company I worked for called FCG Engineering. The men in the room informed me that the company was about to get sold and they were planning to walk out before it happened. It was a little intimidating because they were all 15 years older than me and I was bummed about potentially losing my job as a programmer. I was invited to be part of this elite team as they explained their plan to buy the company or walk out. My journey began when I agreed to join them and that’s how I started my first company, Tech-Source that went on to be a global leader in graphics boards used in Air Traffic Control systems around the world.
Funding the startup of Tech-Source was accomplished through negotiating a Management Buyout that included a license agreement with the parent company that owned FCG Engineering. We agreed to take a major cut in salary for ownership in the company and a license fee of 5% of revenues back to the parent company paid annually, forever. It was the forever part that I had to renegotiate a few years later when I became President of Tech-Source.
We had one customer on a maintenance contract that we serviced. Six of us ate beans and weenies servicing the one customer until we got another and then another and then another. It was exciting, scary and frustrating as I watched my friends all take higher paying jobs elsewhere and than it all began to change and my journey began.
There are many ways to fund your company. What creative methods have you used?