Money for Start-ups

8 February 2001
If you want to turn your small e-business into a big e-business, you're going to need money, and lots of it. The big issue is how to find the money you'll need to get your e-business off the ground.

Just a year or two ago, venture capitalists (VCs) offered big money fast. These days, it's harder to get venture capital dollars.

Still, there's plenty of money floating around. However, in light of the recent spate of dot-bomb deaths, VCs have become more selective in how and where they invest.

To attract venture capital dollars, you have to produce a viable business plan, a proven customer base and a rudimentary revenue stream. In reality, most e-businesses that need money don't have these things.

Some e-businesses have found alternative sources of capital by offering equity investments to nontraditional sources of capital.

For example, competent legal counsel is something that e-businesses can't live without, but cash-poor startups often can't afford it. They often do their own legal work, and hope they can survive long enough to generate some funds.

Equity investments can change all this. Many cash-strapped e-businesses offer law firms stock in exchange for reduced-price services.

Like VCs, professionals are more reluctant to invest in startups than they were a year ago. Still, if you can find a willing professional, this could be a win-win situation.

If you're not quite ready to give up a piece of your company, Washington, D.C., has several bureaucracies that may be available to help finance your e-business.

One example is the Small Business Administration (SBA) [Visit]. It offers commercial loans to e-businesses with terms more favorable than you'd find at most commercial banks. Further, the SBA licenses and regulates other private investment firms called SBICs, or Small Business Investment Companies [].

Of course, you'll first have to complete a lot of paperwork and then wait while your paperwork is processed.

Unfortunately, delays in closing loans can kill your e-business as thoroughly as if you had received no loan at all. Therefore, if you're thinking about applying for a SBA or SBIC loan, avoid putting all of your cash eggs in the same financing basket, and consider simultaneously pursuing other avenues of funding.

Founders of Internet startups often find it tempting to self-fund their companies. To do this, they often mortgage their family's home, or withdraw their life savings.

I think this financing method is even scarier than watching your e-business go down the drain. After all, if you haven't invested all your personal funds in your e-business and your company fails, at least you have a place to call home. If you've leveraged your house to support your failed business, you may end up on the street.

Nonetheless, if you extend a personal loan to your e-business, remember that this should not be thought of as a ``goal.'

Instead, you should treat a personal loan as a ``beginning,' and use the money to support your company while seeking other sources of revenue. Once you secure those additional revenue sources, immediately pay back your personal loan.

Be aware if you find a VC: They don't like you paying yourself back with their money.

Finally, many businesses have started with funds from one of the three F's of financing -- friends, fools and family. If you win your bet on your business, they win too.

With a bit of creativity, you can find revenue sources other than traditional venture capitalists. Speak to an attorney or accountant experienced in venture capital issues from the beginning. They're often plugged into a network of investors. Just a few minutes with a knowledgeable lawyer or accountant could save you hours of funding frustration.

Mark Grossman's "TechLaw" column appears in numerous publications. Mark Grossman has extensive experience as a speaker as well. If you would like him to speak before your group or corporate meeting, please call (305) 443-8180 for information.

You can find a TechLaw archive at:

If you have any comments, please send them to

Disclaimer: The advice given in the TechLaw column should not be considered legal advice. This newsletter only provides general educational information. You must never rely upon the advice given here. Your individual situation may not fit the generalizations discussed. Only your attorney can evaluate your individual situation and give you advice.

Except as provided below, you may feel free to forward, distribute and copy the TechLaw column if you distribute and copy it without any changes and you include all headers and other identifying information. You may not copy it to a Web site.