I’ve directly or indirectly participated in the financing of over 35 startup companies in the past dozen or so years and have provided cash flow advice to all of the CEOs of these businesses. Currently, there is a lot of focus on business formation and the need for the first $50,000 to $250,000 in seed funding, or angel financing, as it is commonly referred to in the investment world.

The entrepreneurs, on the one hand, are the founders/owners of the new business and kicking off the beginning of what they think is destined to be a huge success. On the other hand, you have the angel investor (or group of investors) that obviously agree with the founding entrepreneurs and think they are the lucky ones that may have found the next multibillion dollar enterprise and investment opportunity. Excitement is everywhere … but how can startups get past the critical pitfalls that plague most new businesses?

The most common advice I’ve given both entrepreneurs and angel investors in these types of scenarios is to build a simple operating plan that is both strategic and has simple milestones. The reason for this is it allows both the management team and the investors to monitor progress jointly and objectively, and the venture gets as far as possible on limited amounts of capital. Examples of both features are listed below:

Strategic Goals To Be Validated

• Build a prototype product/service that you can put into a customer’s hand.

• Conduct a market research study to determine the exact vertical markets you could exploit if you had additional funding (after product validation).

• Build a financial plan and “sources and uses” to see how much money you need and where you would spend it.

Simple Milestones to Help Achieve Strategic Goals

• Create an advisory board and seek two to four industry experts that understand the value proposition of your product/service offering and are able to help you secure beta customers.

• Secure one to three beta customers, preferably public companies who have the funds to purchase your product/service. In a laser-like manner, focus your attention on them, solicit feedback … listen … refine … listen … listen … listen.

• While you still have money in the bank, secure bridge funding alternatives.

People often think about financing a business when it is too late. A great management team and supportive investors carry the ball far down the field. However, when it comes to managing cash flow advice from a variety of people, it’s best to get that advice before you need the money. So here it is! 

Bridge funding is just what it sounds like. It’s money you use between your angel financing and a larger capital raise to make more company progress and hit more milestones. Continued progress and momentum building is often critical in securing additional growth funding. Most venture capital firms take their time in making final funding decisions. If they move slowly and you don’t have interim financing to carry you along, your great idea could die on the vine or your desperation could hurt the value of your company. The best places I think entrepreneurs and their angel investors should look for attaining bridge financing is:

• Invoice Factoring – you’ve spent a lot of time/effort/money to land those early beta customers, who likely have great credit themselves. Take advantage of their credit and find a factoring company to provide a cash advance against sales you’ve made to your beta customers.

• Institutional bridge round – approach a venture capital firm that may be interested in making a larger investment in your company after you hit even more milestones. Work with that firm to develop those goals and map out a plan to get there. If you do, you’ll be well positioned to get a larger investment and if not, the venture capital firm can limit its financial exposure.
  

Fast A/R Funding specializes in helping entrepreneurs, new and small businesses bridge the cash flow gap with factoring. Download our informative “Factoring 101” guide, or call 888.833.2286 to speak with one of our small business finance consultants.