Innovation

Lessons from the Dragons' Den: Capital connections

Written by Rick Spence


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Capital connections
What Dragons want

Here be dragons: 
Jim Treliving
|  
Kevin O’Leary

Laurence Lewin

Jennifer Wood
|  
Robert Herjavec

A fast guide to the first stops in your search for startup financing

Chartered banks

Knocking the banks may be small business’s favourite pastime, but Canada’s big lenders are an important source of financing for new businesses. In fact, 36% of the country’s top young growth companies, as ranked on the 2006 PROFIT HOT 50, acquired at least some of their startup capital from bank sources. However, new entrepreneurs should not expect to laugh all the way from the bank: in exchange for low interest rates relative to other sources of debt financing, banks need a strong sense of security. In rare cases, that derives from a banker’s total confidence in your surefire business plan; in most instances, it comes from the collateral (e.g., your house) that you pledge against a loan.

Love money

After founders’ own capital, friends and family are perhaps the simplest sources of business financing. Indeed, “love money” usually has few strings attached — except for the possibility of destroying the relationship if the new business tanks or the terms of the deal are misunderstood by one or both parties. Avoid the latter by putting the deal in writing. As for the former, it’s buyer beware; indeed, some say love money is capital provided by “friends, family and fools.”

Credit cards

Borrowing at 18.9% does not sound like a sensible way to finance a startup, but the low rates offered by credit-card companies to sign up new clients and encourage balance transfers has made plastic a viable financing tool. Juggle several credit cards, and you may be able to borrow for the long term near prime — with few questions asked.

Government

Although grants, tax credits and subsidies are not as plentiful as they were before “deficit” became a dirty word, there remain countless sources of government funding for startups. A good place to start your search for government cash is the interactive guide to financing at Industry Canada’s Strategis website. Also, check out the Canada Small Business Financing Loan program, which guarantees the bulk of any bank loan of up to $250,000 to qualifying companies at regular rates plus an administration fee.

Angel investors

Like the multimillionaire investors on TV’s Dragons’ Den, angels are usually successful former entrepreneurs who purchase equity in emerging high-potential businesses as a way of staying “in the game.” Typical angel placements range from $20,000 to $500,000, although these savvy investors also bring experience, expertise and contacts to the table. As private individual investors, angels can be hard to find, but the task is getting easier as more of them form networking associations to publicize their desire to review business plans. Angels seek rewards commensurate to the risks of investing in young, unproven businesses. If your business plan can’t realistically deliver returns of at least 1,000% after five years, then bark up a different money tree.


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Skin in the game
Capital connections
What Dragons want

Business Development Bank of Canada

Specializing in the entrepreneurial market, this Crown corporation provides term loans, lines of credit and consulting services. Its rates are slightly higher than those of traditional banks, but it offers welcome flexibility in return. For instance, the BDC will lend qualifying startups up to $150,000, with the added benefit of customizable repayment options. The BDC is also a significant provider of seed-stage venture capital.

Venture capital

If you need a lot of money — say, $500,000 to $5 million — to start a business with explosive growth potential that’s likely to be acquired or go public within five years, then venture capital may be your meal ticket. However, besides the possibility of super returns, VCs want seats on your board (got one?) if not control of your company. That’s why some entrepreneurs refer to VCs as “vulture” capitalists.

Originally appeared on PROFITguide.com