Small business entrepreneurs are also known as “lifestyle entrepreneurs” or “Main Street entrepreneurs.” Their businesses tend to be owner-operated, operate from a physical location, and have less than 25 employees. They typically use established business models—e.g. retail stores or yoga studios—and distinguish their business through superior quality or service. Such businesses are best supported through technical assistance—business plan development, financial analysis, marketing support, etc.
There are many organizations that provide technical assistance, including the Small Business Administration’s partner, SCORE, the Massachusetts Small Business Development Center, Chambers of Commerce, Community Development Corporations (CDCs) and Community Development Financial Institutions (CDFIs). Many of these organizations can also help business owners secure collateralized commercial loans.
Startup entrepreneurs launch new companies from scratch. When we say “startup entrepreneur”, we mean founders launching companies that can grow quickly over a short period of time, and we call those companies “scalable“. Startup founders typically build their companies around an innovation that gives them a competitive advantage. For example, we worked with a company that built a mnemonics-based app to help users remember their passwords. These two factors—scalability and an innovation advantage—helps startup entrepreneurs raise capital from investors in exchange for partial ownership. (Investors in startups get no collateral, so if the company fails, they lose their money.) Startup entrepreneurs are particularly well supported by accelerators and incubators. The article from the MassChallenge Innovation Blog explains the difference. Both types of organizations help founders in a variety of ways, including business plan development, pre-product customer validation, access to experts and mentors, and introductions to potential investors.
MFN is tailored to the needs of startup founders. While small business and mature business entrepreneurs may discover helpful resources through MFN, the resources that we identify below may be a better place to start.
If you are a small business entrepreneur, you may need help building a website, developing a social media presence, and then using those outlets for digital marketing. If that’s your key need, then find people who can help you with the tasks. Small business entrepreneurs should also develop financial projections. Comparing your projections with actual income and expenses will allow you to make rapid adjustments to avoid a negative spiral. Most technical assistance experts can help you develop financial projections.
If you own a mature business, you’re probably well aware of your key needs. If not, consider having a third-party consultant look at your business with fresh eyes. Many large companies hire management consulting firms to do this, but those firms are often too expensive for small- to medium-sized businesses. We encourage you to reach out to various technical assistance resources for less expensive help, and again, the more specific you can be about the help you need, the better (e.g. reducing staff turnover, or adapting to a more efficient inventory management system). If you’re looking to sell your business, you may wish to identify some brokers who specialize in marketing companies to private equity firms.
If you are a startup entrepreneur, we recommend considering two key factors before seeking help: stage and sector. By stage, we mean: How far along is your startup? Are you in the concept stage? Do you have a prototype product or service? Do you have paying customers? Is your business breaking even? Are you profitable? By sector, we mean, for example, health technology, clean energy, finance technology (fintech), hardware (products you can hold or touch), education technology (ed tech) or other. In our experience, earlier stage companies benefit most from sector-agnostic accelerators like Lever. When companies have a product or service that is ready to take to the market, sector-focused accelerators may be more helpful. For example, United Aircraft Technologies, which makes parts for air and spacecraft, got introductions to major manufacturers through participation in the US Army’s XTECH accelerator program.
Most businesses need outside capital to launch or grow. Sources of capital depend on the business model. The three types of entrepreneurs described above, typically access capital from different sources.
More often than not, founders self-fund at some level. Most founders fund their startups indirectly with “sweat equity,””, working for little or no compensation. Many use their own savings to set up their business. We don’t recommend it, but we know some founders who started their business with a credit card.
We note that the frequent necessity of self-funding favors founders -of -means and is thus a driver of inequity. It’s difficult to start a new business without savings or a side income. Small businesses are advantaged by business models that yield revenues quickly (retail, restaurants, in-person service delivery). Scalable startups building a company based on an innovation may require months or years before they have a product in the market that generates revenues. (Which is why equity funding sources like (angel investors, VCs) are so important to startups.)
It is quite common for founders to solicit and receive funding from friends and family in exchange for partial ownership of the company (equity). In this context, friends and family are people who know the founder well enough to believe they’ll succeed with their new enterprise. While they might have some questions about the business model, their investment is mostly a bet on the founder. Because of the risk involved—most startups fail—a good rule of thumb is to not accept capital from anyone who can’t afford to lose it all.
Some startups, especially small businesses, fund their growth with profits. Revenues are at once the best source of growth capital, but also the hardest to obtain. Many businesses lose money in the early stages and the founders work hard to break even. It may take several years to become profitable. If you can fund your growth with profits, you don’t have to give up any equity in the company or pay interest to a lender.
Most banks have a commercial loan division to service businesses. The standard business loan structure is repayment of principal and interest over a fixed period of time, like a home mortgage. Since banks are loaning their depositor’s money, they require their lendees to have a strong credit rating. They often require collateral that the bank can seize and sell if the loan isn’t paid back. Larger companies with strong cash flows can often guarantee loans based on future revenues (accounts receivable and long-term contracts).
There are several lenders who specialize in smaller loans ($10-$50,000) for small businesses. Many are non-profit organizations with economic development missions. They have fewer regulatory constraints than banks, so can be more flexible in their lending. In Greenfield, Mass., the Franklin County Community Development Corporation makes loans from a revolving fund. In Holyoke, Common Capital’s Community Development Financial Institutions Fund (CDFI) makes similar loans through a federal program. These specialty lenders often focus on specific geographic areas. To find such resources near you, we recommend that you contact a commercial loan officer at a local bank for referrals and introductions.
Crowdfunding on any number of platforms can be a good way to raise seed capital. There are two basic formats:. Businesses can give merchandise or services to funders, or they can give them equity (stock). Two of the better known platforms are Kickstarter and Startengine. Different platforms specialize in different types of businesses, so do some research to find a good fit.
Angels typically invest their own money into selected startups. These investors have both wealth and the confidence to make investments in this highly risky asset class. Angel investors typically write smaller checks than VC firms, so they focus on early-stage, often pre-revenue startups. Angel investors can be an important source of equity capital, but they can be quirky. We know many founders who spent a lot of time talking to angels without ever securing an investment. It can be more efficient to engage angels who are affiliated with angel investment groups, where you can pitch to several investors at once. Here’s a list of Boston-area angel groups.
Venture capital firms receive funding from other investors, called limited partners, or LPs, who agree to let the VC firm make investment decisions on their behalf. Founders rarely meet LPs. Instead they interact with VC firm staff. VC firms are typically organized in two tiers: Managing Partners and associates. If you get a meeting with a VC firm, it’s often with an associate whose job it is to screen and select the types of companies that the firm prioritizes. If you get through that gate, you’ll meet the Managing Partners who will ultimately decide whether to invest. Venture capital investments range from $100,000 to tens of millions. Early-stage startups should focus on smaller VC firms that will write checks for $500K or less. Larger VC firms make larger investments—$1M and up, but focus on more mature startups that have demonstrable traction, growing revenues, and a lot of potential.
For mature businesses with $20M or more in revenues, private equity (PE) can be a source of capital. PE firms typically seek a majority interest (at least 51% ownership), which gives them control over the company. Purchase, renovation, and sale of older homes (“house flipping”) is a good simile for PE investing. The PE firm acquires a company at fair but low valuation, “fixes it up” by bringing in new resources to stimulate revenue growth and profitability, then sells it for a profit to another company looking to grow through acquisition. From the perspective of the founder, PE investment means both loss of control of the company and the opportunity to cash out.
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