THE FUNDING MINDSET

How to Think Like an Investor

Learn to raise capital by any means. That's your primary job as an entrepreneur.

— RICHARD BRANSON

Imagine that it's 1491 and you're Christopher Columbus, looking for your next profitable venture. You notice that all the trade routes from Europe to the lucrative markets in India and China are long and perilous. You believe that if you sail west across the Atlantic Ocean you can find a new, shorter trade route to the Far East — but you need money to build and equip the ships for your voyage. You approach the king of Portugal and then the merchants of Genoa and Venice, but they all turn you down. Finally, you get an audience with Queen Isabella of Spain. You'd been building relationships within the Spanish court since 1485, but this is your last chance to raise the money you need. You walk in and make your pitch for Spain to finance your great venture.

What do you imagine Queen Isabella is thinking as she listens to your proposal? "Let me see if I understand: This guy wants me to give him a lot of money to build three ships to reach the East by sailing west, which, according to every expert, can't be done. Smart people in Portugal, Genoa, and Venice have already turned him down flat. Why should I be crazy enough to give him money?"

Of course, Queen Isabella was crazy enough, and the Spanish court gave Columbus the modern equivalent of $14,000 to build his ships. Columbus sailed west, "discovered" the New World, and (for good or ill) created the foundation for the great Spanish empire. And because of Columbus's voyages, during the sixteenth century Spain laid claim to much of North and South America and became a dominant world power.

By the way, it also extracted the equivalent of $1.5 trillion in gold and silver from its American colonies. Not a bad return on a $14,000 investment.

Columbus's story is a metaphor for what entrepreneurs are doing every day: inventing new or better products or services that solve problems, and then starting businesses to turn those ideas or inventions into reality.

The Global Entrepreneurship Monitor estimates that approximately 100 million businesses worldwide — that's three businesses every second — are launched each year. In 2017 in the United States alone, approximately 540,000 new businesses were started each month.

But while some legendary enterprises began on a shoestring in a garage or basement, even the "leanest" startup needs capital to open its doors. According to a 2015 study by Intuit, 64 percent of U.S. entrepreneurs started their businesses with investments of less than $10,000. That money either comes from the entrepreneur's personal savings (57 percent of the time) or a combination of personal funds plus investment by family and friends (82 percent of the time).

However, starting a venture isn't the same as keeping it up and running. The Kauffman Firm Survey (which studies business activities of startup companies) estimates that, on average, it takes a minimum of $80,000 to operate a small business in its first year. That's a lot more capital than most people can raise every year, either from personal assets or from friends and family. So like Columbus, at some point many entrepreneurs will need to find outside investment to finance operations.

The good news is that today, a lot of outside money is available to fund great businesses. Consider the following:

* The National Small Business Association reported that 75 percent of small businesses used some kind of financing in 2015–2016. Sources of these funds included loans, credit cards, venture capital, and crowdfunding.

* In 2015 bank loans going to small businesses totaled approximately $600 billion. That same year, businesses received $593 billion in funds from venture capital (VC) firms, angels, and finance companies other than banks.

* In 2016 "angels" (individuals investing their own money in companies) funded 64,380 entrepreneurial ventures to the tune of $21.3 billion.

* In 2017 VCs invested a total of $84 billion in 7,783 companies — the highest level of investment since the early 2000s.

* In 2017 the number of direct investment deals funded by family offices (which manage investments for high-net worth individuals and families) was more than twice the number of deals funded by traditional VC firms.

* Alternative finance lending (which includes crowdfunding and P2P online lending) is growing rapidly as a resource for businesses. In 2016, $8.8 billion in alternative business funding was raised in the U.S. by 143,344 businesses. U.S.-based companies used equity-based crowdfunding to raise $569.5 million, while revenue/profit-sharing crowdfunding produced $28.5 million.

* In 2017 companies worldwide raised $5.6 billion through initial coin offerings (ICOs), where investors used funds to purchase tokens or digital currency that could then be traded on online exchanges.

In some ways, entrepreneurs are in what could be called a "golden age" of fundraising, with the advent of P2P online lending, equity and revenue/ profit-sharing crowdfunding, tokenization, and blockchain-based digital currency adding to the healthy numbers for venture capital, family offices, and seed and early-stage angel investing. But while it seems as if the funding landscape is expanding dramatically, the same perennial three questions exist for anyone who needs capital for their business: (1) Where's the money? (2) How can I gain access to the people and institutions that have it? And (3) what will it take to persuade them to give/loan it to or invest it in my startup?

Unfortunately, entrepreneurs often lack the time, expertise, or knowledge to take on the complex task of finding the funding that can help them reach their goals. As a result, for every startup that becomes the next Airbnb, Amazon, Lyft, or Warby Parker, thousands of other, equally...