Jason asks …

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Jason asks …

What is the best way to get funding for a business idea. I have already tapped my home equity and have already approached friends and family for previous business ideas and they either invested or did not have the ability to invest. I have a great idea right now, and the timing is right, but this idea requires serious capital, more than I can get from my current sources. I am almost done with a business plan, and was going to sent it to a few people who I know that are well connected, but I still think there has to be a better way. What would you do?

How to get funding for a business idea?

Well, there are essentially three ways:

1. Beg: this is where the Three F’s come in: ask Friends, Family, and Fools to invest … essentially you have an idea – but, little more – so, you ‘beg’ your F’s to invest in you. At the end of the day, you can do all the financials that you like, but these people are giving you money with little expectation of getting anything back … because they like – and, trust – you.

2. Borrow: reach deep into your reserves, throw caution to the wind, borrow against your house. As my Grandpa said to my Grandma, as they were trying to rebuild the lives that the Nazis stole from them: “you can always get a house from a business, but you can never get a business from a house” … unless, of course, you are willing to do what you have already done, which is borrow against it.

3. Steal: solicit money from investors with the modern day ‘robbing tools’ of a slick presentation, a shady set of numbers, and a 30 second elevator pitch. Just like the guy who wanted me to buy 20% of his ‘business’ (a half-developed web-site) for nearly $2 Mill. – valuing the whole, glossy box-without-many-dice at a cool $8 mill.!

My practical suggestion: shelve the idea until you can generate sufficient seed capital out of the existing business/es that you already have to:

a) Pay back your friends and family for the money they have already given you on ‘good faith’, and

b) Pay down your mortgage and existing business loans, and

c) Generate a working prototype of your new business – at least to the stage that it demonstrates ‘traction’ (e.g. generates circa $500k a year in revenue). Then you should read Art of the Start by Guy Kawasaki before doing the rounds of Angel Investors.

If you don’t do a) and you do find a way to successfully launch this new business, I would expect to see some very happy Family and Friends on the share register 🙂

Jason, if this was your first attempt at a business, I would give you different advice …

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Reader Comments

Thanks for the answer to the question. It is really good. After I wrote this question I had a meeting with a good friend of mine who wants to invest the 5 million he has in savings into Arizona real estate. I told him I can help him do that, I may just have found a source for money.

Right now I don’t even generate enough to pay all of the bills much less pay down anything. I have been working on selling one of my other businesses. I should be able to get 100k for it, and that will really give me a kick start.

@ Jason – sounds great! Except the $5mill. in AZ R/E bit 😉

Although, I must admit that I was seriously looking at a Sedona AZ commercial property until my wife’s ‘fortune teller’ told her to tell me not to (“environmental reason” … there happened to be a small – or so I was told – environmental issue with the site that I had NOT even bothered to mention to my wife … go figure) … so I didn’t … really! :))

Well we don’t plan to buy and hold anything. We plan to cherry pick the very best deals and flip them to first time home buyers. We have found that first time home buyers with good jobs and good credit are still able to get loans.

If you want to invest in Arizona, I would suggest Flagstaff or Prescott, both are growing like crazy.

@ Jason – sounds like a business venture to me … good luck with it!